When you acquire a vehicle through Ijarah Finance under an Ijarah Thuma Albai agreement, you will still need to pay goods and services tax (GST). While this might seem like an additional burden, you should know that paying GST reinforces this finance model as truly halal.
Let’s explore why GST is necessary in this form of Islamic finance in Sydney.
Rental Payments Are Considered A Service
The Ijarah Thuma Albai structure dictates that the financier is the actual owner of the asset and then leases it to the customer for use. Customers making payments are classified as rental payments rather than loan repayments.
Under Australian tax law, all rental payments for goods and equipment are subject to GST because they are a taxable supply of a service rather than a financial loan product.
Conventional loans—which are not allowed under Islamic law—consist of repayments made up of principal and interest. Since these payments are classified as financial supplies, no GST is applicable to them.
Trade-Based Agreements Vs. Money-For-Money Transactions
The Ijarah Thuma Albai arrangement is a trade-based one, whereby customers rent the asset, and your rent payments compensate for using the asset. This is different from making monthly payments towards the cost of borrowing money, which is forbidden in Sharia law as it involves the payment of interest or riba.
Since the Ijarah Thuma Albai structure is a trade transaction rather than an interest-bearing financial contract, you must pay GST on every rental payment.
A conventional interest-based loan is a money-for-money transaction, which is exempt from GST under Australian law because it does not involve the supply of goods or services.
Compliance With Both Australian Law And Sharia Principles
While GST might be seen as undesirable, the fact is that it actually proves that the agreement is fully compliant with both Sharia and Australian legal frameworks.
Under Sharia law, money cannot be lent for profit, which is what conventional interest-based loans do. However, companies can rent assets for fair compensation. Taxable supplies, including asset leases, are subject to GST in Australia.
Paying GST therefore validates that the lease agreement is legitimate and rather than an interest-based loan in disguise. You can also have peace of mind knowing you’re engaging in fully halal financial activities.
If you want to finance a new car for your business using completely halal Islamic finance in Sydney, then Ijarah Finance can help you out. Our expert team makes the application process simple, ensuring quick access to the funds without compromising your faith. Apply online now or contact us for further information.