Understanding the impact of a year of GST on rental marketplaces
It has been a year since the Goods and Services Tax (GST) reform was implemented, and it has been a great measure for India’s rental services industry. GST has allowed rental vendors to claim input credit on their business, reducing the cost to the consumer and lightening the tax burden on platforms and marketplaces too. We believe that most vendors have adopted GST, and the companies have had the benefit of paying tax only on net revenues, which is extremely beneficial for the company. However, there is far more that can be done, especially to promote renting over purchasing to boost the Indian economy and reduce imports.
The rental industry and GST
There are good reasons for regulators to provide regulatory support to the rental sector in India. Renting white goods and electronic equipment is often the only way people with lower incomes can access them. This makes renting an essential need for specific target audiences, especially medium-sized enterprises and early-stage startups that are looking to keep their costs low. Given that promoting these businesses and protecting these populations is a stated goal of the government and part of its mandate, high taxes on these segments is counterproductive and inhibits growth.
This becomes even more pressing when the regulatory system seems to not have taken into consideration the unique nature of the renting business in the first place.
The rental and retail industry work in very different ways and the application of the same taxation regime on them doesn’t make sense. The way renting works is that vendors pay the retail price of the product, and then recover that capital expense over time by frequently renting out the product to consumers. This means that for vendors to recover the capital expense of the product, they often need to rent it out dozens of times, especially for expensive electronic equipment. The current GST regime charges tax on each of these transactions, making the overall cost to the vendor exorbitant.
Charging the same rate on rental and purchase of the same product, therefore, leads to an unfair burden being placed on the vendor or the consumer of rental services. This burden, given the dynamics of this sector, is one that both providers and end-consumers can ill-afford.
GST on electronics
What makes this disparity substantially more egregious is that it also affects goods that are economic multipliers. Essential electronics for personal and business growth like laptops, projectors, and audiovisual equipment attract a very high rate of GST, looking at a government promoting the adoption of a digital economy. The writing on the wall is very clear – digital adoption and e-commerce are good and they help multiply revenue for businesses. For smaller businesses, renting such equipment is substantially more economical than outright purchase due to the lower costs and reduced liability.
Making these companies face an additional tax burden every time they rent such equipment, especially at the high rate that these goods attract, impedes their growth. According to a Google-KPMG study, India’s small and medium businesses will need to be digitally transformed to unlock a 10 percent increase in GDP driven purely by growth in the sector. The Indian economy sorely needs this, as it will help the sector increase revenues by 2x while increasing the number of job opportunities available in the market.
The GST has indubitably been an incredibly beneficial reform for the Indian economy and has been cited as a compelling reason for India’s climb in the global Ease of Doing Business Ranking. But the government would do well to also address how the GST regime is making it harder for critical audiences and economic sectors to access the equipment they need to be future-ready and grow well in a digital economy. A reduction on GST for electronic equipment to 12-15 percent would be a welcome first step; reducing GST on rental transactions to a quarter or half of the GST for purchase would be the real big move to promote the rental industry.
There is no dearth of electronic equipment already in India, but a lot more is still being imported because so much of this equipment is underused or underutilized. By unlocking the rental industry, the government can ensure more efficient use of the digital systems that are already in the country, and reduce India’s import burden in this sector.
At this stage, with a year passed after the implementation of GST, the government has a choice before it – to encourage the optimized use of equipment, encourage growth, and rationalize the regime on one hand, or continue to impose an unfair burden on weaker sections of the economy. The smarter choice is clearly the former, and it would help the GST regime achieve more of its promise in promoting and optimizing the Indian economy.
Harsh Dhand is the CEO and Co-Founder of RENTSHER.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)