The Supreme Court has held that banks and financial institutions, including non-banking financial companies, are liable to pay service tax on transactions of leasing and hire purchase of moveable goods.
While bringing such services within the service tax net, a Bench headed by chief justice SH Kapadia has upheld the levy of service tax on hire purchase and leasing transactions, notwithstanding that the same transactions are chargeable to the sales tax (now VAT).
The decision in effect has upheld the double taxation of the same transaction of hire purchase and leasing to both the service tax as well as the VAT.
These are services rendered to their customers which comes within the meaning of the expression taxable services... the taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/service rendered by the service provider to its customer, the court said.
It further added that as far as the taxable value in case of financial leasing including equipment leasing and hire-purchase is concerned, the amount received as principal is not the consideration for services rendered. Such amount is credited to the capital account of the lessor/hire-purchase service provider.
It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges are treated as considerations for services rendered and accordingly they constitute the value of taxable services on which service tax is made payable, the judgement stated.
The decision has come on a batch of petition led by Association of Leasing & Financial Service Companies which alleged that the service tax imposed by Section 66 of the Finance Act 1994 on the value of taxable services referred to in sections 65(105)(zm) and 65(12) relating to financial leasing services including equipment leasing and hire purchase was beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution.
The firms said that when sales tax was already paid for the transfer of the right to use the goods particularly when such transfer is a deemed sale, it is not open to Parliament to impose service tax on the same transaction once again.