On 16 June 2014, IRAS issued a rewritten e-Tax Guide on GST Treatment of Hire Purchase Agreements and Financing Instruments, which replaces the earlier Guide published on 1 October 2012.
This e-Tax Guide seeks to explain the following:
- the conditions for treating financing instruments as “hire purchase agreements” for GST purposes;
- the GST treatment for hire purchase agreements, their invoicing and reporting requirements;
- the applicability of Gross Margin Scheme to hire purchase agreements.
Conditions for treating financing instruments as “hire purchase agreements” for GST purposes
A financing or leasing instrument will be treated as a “hire purchase
agreement” for GST purposes if the following two conditions are satisfied:
a) The lease provides an option or right for the lessee to purchase the
leased goods prior to or at the end of the lease period; and
b) The leased goods are not recognised as the lessor’s assets in his
GST treatment of Hire Purchase (HP) agreements
A typical hire purchase arrangement involves three parties, i.e. the supplier of goods, the financier, and the hirer. Usually, the supplier collects a deposit and the GST on the full value of goods upfront from hirer. After the HP arrangement is finalised, the financier pays the remaining amount (“financed amount”) to the supplier.
Supplies made by the supplier
In a sale of goods made under a hire purchase agreement, the supplier
makes two supplies:
- a supply of service to the hirer in return for the deposit paid by the hirer to him
- a supply of goods to the financier for the financed amount. This is because the title of the goods is transferred to the financier instead of the hirer in return for the balance payment made by the financier.
Supplies made by the financier
Under a hire purchase agreement, a financier makes two supplies to the hirer for GST purposes. They comprise a taxable supply of goods and an exempt supply of financial service (instalment credit finance).
Supply of goods
The financier has to charge GST on the value of the goods at the point of transfer of possession. This is notwithstanding that the financier remains as the legal owner of the goods until the hirer exercises the option to purchase the goods or pays the last instalment.
Supply of finance service (instalment credit finance)
If the financier separately charges and discloses the interest amount to the hirer, the provision of instalment credit finance is an exempt supply. The interest amount is exempted from GST.
However, if the interest amount is not separately disclosed or charged, then the financier has to charge GST on full amount paid or payable on the hire purchase.
If financier transfers/assigns the provision of instalment credit facility in a hire purchase agreement
If the financier transfers/assigns the instalment credit facility in a HP agreement to another financier, such a transfer or assignment is an exempt supply. Hence, no GST will be levied. The financier would also transfer/assign the title to goods when he assigns the HP agreement to the new financier. Such transfer/assignment of the title to goods is not treated as a supply for GST purposes (i.e. will not attract GST).
In the event that the hirer defaults on payment, the financier may repossess the goods. Repossession of the goods is not a supply and no GST is chargeable.
When the financier subsequently sells the goods, the supply will be treated as being made by the hirer. Thus, if the hirer is GST-registered, the financier (whether or not he is GST-registered) is required to charge GST on the sale. The financier is required to provide a statement of sale and remit the GST due to IRAS within 21 days from the date of sale. The hirer should not report such sales transaction in his GST return as the tax payable has already been accounted for in the statement.
Application of the Gross Margin Scheme
The gross margin scheme is normally applied to the sales of second- hand or used goods. However, the GST legislation also allows the scheme to be used for both new and used goods if they are supplied under a HP agreement. The extension of the gross margin scheme to new goods supplied under HP agreements has been applied only to
pure financiers (such as banks, finance companies or leasing companies).
These are businesses whose intention is to provide solely financing and they do not add a mark-up to the price of the goods being supplied under HP agreements. In other words, these are not businesses that purchase goods for resale purposes.
If a financing instrument, such as finance lease or conditional sale
agreement satisfies the conditions to be treated as “hire
purchase agreement”, the extension of the gross margin scheme to the supply of new goods will also apply to this instrument. This is provided the pure financier has obtained prior approval from the Comptroller to use this scheme for new goods supplied by him under HP agreements.
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