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Hire purchase financing out of service tax net
July, 04th 2007
There is good news on the tax front for hire purchase financiers. The Customs, Excise and Service Tax Appellate Tribunal in a recent ruling said that hire purchase financing is not a taxable service.

The tribunal took this view in case of Bajaj Auto Finance. It distinguished a hire purchase arrangement from a hire purchase finance arrangement for taxation purpose.

The tribunal held that fundamentally, in case of hire purchase arrangement, the title to the goods remains with the hire purchase company whereas in case of hire purchase financing arrangement, the title to the goods remains with the hirer.

It observed that a hire purchase arrangement must be distinguished from a hire purchase financing arrangement wherein a customer enters into an arrangement with a view to financing his purchase which is in the form of hire purchase agreement with the financier, but actually amounts to a loan transaction.

The tribunal held that since the category of Banking and Other Financial Services (which is a taxable service) covers hire purchase and not hire purchase financing, the same cannot be covered under this category.

But there are apprehensions that the government would issue a notification to tax hire purchase finance transactions too. Given the past experience, one would expect that the government would effect amendments to tax hire purchase finance transactions, but hopefully not retrospectively, said Prashant Deshpande, executive director, PwC.

Hire Purchase transactions have been bought under service tax net from July 16, 2001. Since then, there have been a lot of issues with regard to levy of service tax on these services. Consequently, the government issued various clarifications on these issues.

For instance, a circular issued in July 2001 stated that there would be no service tax on the principal amount charged by the hirer whereas interest and lease management fee/processing fee/documentation charges would attract service tax.

Subsequently, a March 2006 notification provided an exemption up to 90% of the interest amount from the payment of service tax. A lot of financing firms in equipment leasing and hire purchase financing would benefit from the tribunals interpretation, although there are fears that the government would prevail over this through a new notification.
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