Page 194 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 12: Hire Purchasing

Notes
ALFS is of the view that with all other sources of funding drying up, public deposits raised
by these companies through their clean track record and personalised service is the only
mode of funding available.
Pointing out that the Deferred Tax accounting standard, under AS-22, now made mandatory
by ICAI, has had a severe impact on leasing companies, the association has stated that
even in a country like Pakistan, deferred tax accounting was mandatory for all except
leasing companies. ALFS has urged the RBI to give NBFCs a time-frame of at least five
years to absorb the impact of this standard on the net owned funds of the NBFCs.

Seeking steps to create a suitable recovery mechanism for HPLCs, viewed as a pre-requisite
for payment of liabilities and public deposits like DRTs for the NBFC sector, the association
has cited problems with regard to re-possession of assets given under HP/Lease, in case of
default, with the police authorities. Authorities, it is pointed out, are quite categorical
about the fact that police support in repossessing assets cannot be provided in the absence
of any clear law on this.
On the Bill to amend the proposed creation and enforcement of security interest by banks
and FIs, it is suggested that the committee under Mr M.R.Umarji (which drafted the Bill)
does not include HP/Leasing activities on the grounds that these were "title retention
contracts and do not involve security interest creation".
The association has sought insertion of a new clause in the Bill, saying "Hire purchase/
leasing contracts being title retention contracts, give full authority to HPLCs to reposess
any asset given under HP/Lease agreement, in case of default."
Welcoming the report of the Indian Bank Association (IBS) Working Group on financing
for purchase of vehicles through HPLCs, under the chairmanship of Mr R.V. Shastri, ALFS
has stated that while the recommendations have been accepted by the Ministry of Finance
and the RBI, the commercial banks were yet to start implementing these in practice.
The apex bank has been urged to instruct banks to start considering proposals from the
NBFC sector for on-lending to the commercial vehicles sector.
Source: http://www.thehindubusinessline.in

12.3 Taxation

The taxation aspects of hire purchase transaction can be divided into three parts:

1. Income Tax,
2. Sales Tax, and
3. Interest Tax.

Let us see each of them one by one.
Income Tax Aspect

Hire purchase, as a financing alternative, offers tax benefits both to the hire-vendor (hire purchase
finance company) and the hirer.
Income tax assessment of the hire purchase or hirer: The hirer is entitled to:

1. The tax shield on depreciation calculated with reference to the cash purchase price and
2. The tax shield on the finance charges.

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