In lease transaction,the party owning the asset (Called lessor) gives it to other person (lessee) for certain period of time for consideration (lease rent)
There are 2 types of leases
- Complete possession and control of asset is handed over
In this case,VAT is applicable
In interstate sale ,CST is applicable
- Complete possession and control of asset is handed over, only lessee is allowed to use it for some period
In this case, no VAT or CST is applicable
However, service tax is applicable on rent paid
How is VAT Charged, if Complete possession and control of asset is handed over?
- Taxable event is the transfer of the right to use any goods
- Taxable Consideration is the total lease payments
- (However, some states allow for deduction of finance charges)
- Input tax credit allowed on purchase.
- Input of goods used in maintenance of asset also available
- However, if asset is purchased is a capital goods(fixed asset), input available in only some states and that too if used for production or sale
- Sale of leased asset after lease period:-Vat is applicable on sales price
Note:-Power to impose VAT is given
As per Article 366 of constitution which states that
“tax on sale or purchase” includes “a tax on the transfer of the right to use any
goods for any purpose (whether or not for a specified period) for cash, deferred
payment or other valuable consideration.
(Sub-clause (d) of clause (29A) of Article 366)