Sales tax provisions relevant for leasing

The major sales tax provisions relevant for leasing are as follows:

  1. The lessor is not entitled for the concessional rate of central sales tax because the asset purchased for leasing is meant neither for resale nor for use in manufacture. (It may be noted that if a firm buys an asset for resale or for use in manufacture it is entitled for the confessional rate of sales tax).
  2. The 46th Amendment Act has brought lease transitions under the purview of ‘sale’ and has empowered the central and state government to levy sales tax on lease transactions. While the Central Sales Tax Act has yet to be amended in this respect, several state governments have amended their sales tax laws to impose sales tax on lease transactions.

a. Levy of Sales Tax:

Sales Tax is leviable when goods are sold. Thus there must be ” Goods and there must be a sale.   “Goods” include all types of movable property. “Sale ” means a transfer of property in goods from one person to another for a consideration. But Sales Tax is leviable only on a person who is a dealer. A casual transaction by a non-dealer is not subject to Sales Tax. Thus, if an individual salary earner sells off his personal car, there is no Sales Tax attracted.   To summarize, Sales Tax is leviable on sale of goods by a dealer.

b. Sales Tax on financial leases:

In a Finance Lease, NBFCs are the owner of the Goods and the lessee only has the right to use the goods on payment of lease rentals. It is a contract of hiring or bailment.   Hence there is no “sale “as defined.

However, there is a transfer of the right to use the goods from us to the lessee. And this has become taxable as a deemed sale. The Sales Tax, also called “Lease Tax “, is leviable on the Transfer of Right to Use the goods from us to the lessee. And the tax is charged as each rental for use of the lease asset becomes due and payable.

It may be noted that Lease Tax is a case of taxing a non-sale -the consumption of utility of goods – though there is no transfer of title. . Whether it is good law or will the Courts strike down this Tax ? We are not sure, but NBFCs are agitating the matter in a Court.

c. Sales Tax on Lease V/s. Hire Purchase Transactions:

Lease is a sale followed by a transfer of right to use. Supplier S sells to the NBFC and the NBFC gives the goods on lease to Customer C (Transfer of the right to use the goods). Hence, there are two sale transactions – the sale proper, and the lease.

In HP, also, there are 2 sales. Supplier S sells to the NBFC and the NBFC simultaneously sells to the Customer C by entering into a hire purchase agreement. Commercially speaking, the two transactions are not different. There are two contracts in either case, usually bundled in a single delivery from the supplier to the end-user.

Therefore, in a Lease, there will be a Sales Tax on the Sale and a Lease Tax (if any) on the transfer of the right to use. In a Hire Purchase there will be 2 Sales Taxes applicable on 2 separate sales. However, sales-tax laws (for historical reasons only) treat lease and hire purchase substantially differently. Since the choice of the instrument, viz., lease or hire purchase, may lead to material sales-tax difference, it is important that the sales-tax implications are analyzed before choosing the instrument or concluding the transaction.

Government Jurisdiction in levying Sales Tax :

  • In a sale outside India or in the course of import into or export out of India: If the sale is outside India or in the course of import into India or export out of India , India cannot tax such a sale.
  • Sale within a State : If the sale is within a state then that state has the power to tax it.
  • Sale in the course of inter state trade: If the sale takes place in the course of Inter state trade, the Central Government can tax such a sale.   However, there is no administering machinery of the Central Government to administer inter state sale tax. The same is delegated to the state governments.

That state where the inter state movement commences has the jurisdiction and the rate chargeable is also that applicable in that state for CST transactions.

Sales Tax Rates :

Since under the sharing arrangement all the CST collections are retained by the state concerned, states have been allowed to reduce the CST rates and also give exemptions. So while as a general rule CST is 10% or such higher rate if the State charges a higher rate of tax on the local sale of the subject goods; or 4% with C Form, this could vary from state to state. But the State Government cannot increase the Central Sales Tax from 10/4 % in any case.   Therefore, NBFC’s will have multiple CST assessments, one in each state from where goods move.

NBFC’s shifting jurisdiction:

As explained, the jurisdiction in Inter state transaction is in the state where movement of goods commences. But NBFCs can shift the jurisdiction from all states to say Maharashtra.

This can be done by endorsement of the LR during transit. If endorsement is done the jurisdiction shifts to the place where endorsement was made. Thus NBFCs could instruct the Supplier to send goods physically to Customer and hand over the LR in our name at our Bombay address. NBFCs will then endorse the Consignee copy of the LR in favour of the Customer and forward it to the Customer. The Customer will claim the goods from the transporter by producing this endorsed LR.

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