Page 195 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Even though the hirer is not the owner he gets the benefit of depreciation on the cash price of the
asset/equipment. Also he can claim finance charges (difference of hire purchase price and cash
price) as expenses. If the agreement provides for the option of purchasing the goods as any time
or of returning the same before the total amount is paid, no deduction of tax at source is to be
made from the consideration of hire paid to the owner.
Income tax assessment of the owner or financer: The consideration for hire/hire charges/income
received by the hire vendor/financer is liable to tax under the head profits and gains of business
and profession where hire purchase constitute the business (mainstream activity) of the assessee,
otherwise as income from other sources. The hire income from house property is generally
taxed as income from house property.
Normal deductions (except depreciation) are allowed while computing the taxable income.

Sales Tax Aspect

The salient features of sales tax pertaining to hire purchase transactions after the Constitution
(Forty Sixth Amendment) Act, 1982, are as discussed in following points:
1. Hire purchase as sale: Hire purchase, though not sale in the true sense, is deemed to be
sale. Such transactions as per se are liable to sales tax. Full tax is payable irrespective of
whether the owner gets the full price of the goods or not.
2. Delivery v/s transfer of property: A hire purchase deal is regarded as a sale immediately
the goods are delivered and not on the transfer of the title to the goods. The quantum of
sales tax is the sales price, thus the sales tax is charged on the whole amount payable by
the hirer to the owner. The sales tax on a hire purchase sale is levied in the state where the
hire purchase agreement is executed.
3. Rate of tax: The rate of sales tax on hire purchase deals vary from state to state. There is,
as a matter of fact, no uniformity even regarding the goods to be taxed. If the rates
undergo a change during the currency of a hire purchase agreement, the rate in force on
the date of the delivery of the goods to the hirer is applicable.

Interest Tax Aspect

The hire purchase finance companies, like other credit/finance companies, have to pay interest
tax under the Interest Tax Act, 1974. According to this Act, interest tax is payable on the total
amount of interest earned less bad debts in the previous year at a rate of 2 percent. The tax is
treated as a tax deductible expense for the purpose of computing the taxable income under the
Income Tax.

12.4 Summary

A hire purchase agreement is defined in the Hire-purchase Act, 1972 as peculiar kind of
transaction in which the goods are let on hire with an option to the hirer to purchase them,
with some specific stipulations.

In a hire purchase transaction, the goods are let on hire, the purchase price is to be paid in
installments and hirer is allowed an option to purchase the goods by paying all the
instalments.

There is no exclusive legislation dealing with hire purchase transaction in India.

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