Two Supplies for GST Purposes

Sales of goods made under a hire purchase agreement typically involve three parties, namely the seller of the goods, the financier (e.g. finance company), and the hirer (e.g. user of the goods). The flow of the supplies for the three parties are as follows:
(1) Seller of goods makes a supply of goods to the financier
(2) Financier in turn makes a supply of the same goods and a supply of instalment credit finance to the hirer.

When a financier enters into a hire purchase agreement with a hirer, financier makes two supplies to the hirer for GST purposes. They are the supply of goods and the supply of financial service (instalment credit finance).

Supply of Goods

The financier has to charge GST on the full value of the goods when he issues the invoice for the first instalment or when the first instalment is paid, whichever is earlier. This is so even when 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 Financial Service

When the financier separately charges and discloses the interest amount to the hirer, the interest is payment for an exempt supply of the provision of instalment credit finance. No GST is payable on the interest.

When the interest amount is not separately disclosed or charged, then the financier has to charge GST on full amount paid or payable on the hired goods.

Transfer to Another Financier

When the financier transfers/assigns the instalment credit facility in a hire purchase 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 hire purchase agreement to the new financier. Such transfer/assignment of the title to goods is not treated as a supply for GST purposes and hence, will not attract GST.

Repossession of the Goods

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.

For more information, please refer to Selling/renting out assets in satisfaction of debt