Service tax applies to leasing services

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Does parliament have the power to levy a service tax on equipment leasing and hire-purchase services or is such power vested only in the states (under entry 54 of list II of the constitution)?

Answering this question in favour of parliament in Association of Leasing & Financial Service Companies v Union of India and others the Supreme Court recently held that the service tax is neither on the material nor on sale, but rather on the financing and funding of the equipment or asset. As such it fell within the meaning of the words “financial leasing services” in section 65(12) (a) (i) of the Finance Act, 1994.

The Association of Leasing & Financial Service Companies was aggrieved by the inclusion of hire-purchase and leasing services within the service tax net.

They argued that including transactions such as financial leasing, equipment leasing and hire-purchase within the definition of “banking and other services” through an amendment of section 65 of the Finance Act, 2001 was beyond the constitutional competence of parliament. Its writ petition to Madras High Court had been dismissed and this civil appeal to the Supreme Court followed.

The financial companies argued that as sales tax was being already paid for the transfer of the right to use the goods, particularly when the transfer is a deemed sale, parliament could not impose service tax on the same transaction.

While dismissing the appeal the Supreme Court observed that there are two different and distinct transactions: the financing transaction and the equipment leasing or hire-purchase transaction. The former attracts service tax, which is a tax on the activity, under section 66 of the Finance Act, 1994 (as amended), whereas the latter would attract local sales tax or VAT, which is a tax on sale of a thing or goods.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] Readers should not act on the basis of this information without seeking professional legal advice.