VAT on Hire Purchase and Instalment Purchase transactions

What are Hire purchase transactions?

In hire purchase transactions,

buyer give monthly or quarterly hire charges to seller.

for certain period of time

and takes possession of goods

Only when all the hire charges are paid, the goods become the property of buyer

In case, buyer fails to pay the hire charges, the seller takes back possession of goods

Hence, property in goods gets transferred from buyer to seller only on payment of all hire charges

What are Instalment Purchase Transactions

In this case, buyer purchases goods from seller but does not pay the whole amount at one go.

He pays the amount in instalments

Hence, property in goods gets transferred from buyer to seller immediately on paying first instalmement

Difference between

VAT on Hire purchase and Installment purchase transactions.

VAT is charged on delivery of goods to buyer(even though property in goods have not yet been technically transferred in case of hire purchase transaction)

Similarly CST is charged in case of interstate hire purchase transaction.

This is because as per

Article 366 of the Constitution

 “tax on sale or purchase” includes “a tax on the delivery of goods on hire-purchase

or any system of payment by installments."

(Sub-clause (c) of clause (29A) of Article 366 of the Constitution )

Treatment of Finance Charges

Monthly hire chares or monthly instalment to be paid to seller contains

certain payment towards interest(called finance charges)

And

certain payment towards repayment of principal

and

In some states, VAT is not charged on these finance charges while in other states, Vat is applicable on whole instalment including hire charges

Goods Returned

VAT is payable on sale of goods

If goods are returned, then output vat is allowed to be adjusted (reduced)

Some vat acts provide a maximum period during which such adjustment in output vat is allowed

This procedure is applicable for normal sales, hire purchase and instalment sales 

Input Tax Credit on Purchase

Since hire purchase and instalment sales are considered normal purchases, input is allowed for the same for the purchaser