VAT ON LEASE TRANSACTIONS

MEANING OF LEASE

As per AS-19 issued by ICAI, lease means an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

In simple terms, lease is a special type of transaction whereby the owner of an asset provides such asset to another person for use over a period of time for a consideration called lease rentals.

Two types of Leases are:-

(i)                 Financial Lease:-A financial lease is a lease in which all risks and rewards incidental to the ownership of an asset are transferred. The buyer has an option to purchase the asset at the end of lease–term.

(ii)                Operating Lease:-A lease other than financial lease is operating lease. There is no option to the buyer to purchase the asset at the end of lease-term.

VAT ON LEASE

In the VAT Act, the definition of sale includes 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. These transactions are known as lease of goods and also referred to as Deemed Sales. The tax on these sales is known as Lease Tax.

Taxability will arise subject to the following conditions:-

Ø  Lessor must be dealer.

Ø  There must be goods available for delivery.

Ø  The lessee should have a legal right to use the goods.

Ø Transfer must be for cash, deferred payment or other valuable consideration.

Ø  Such transfer may or may not be for a specified period.

Ø  Such transfer may be for any purpose, whether commercial or personal purpose.

Taxable Turnover

Taxable turnover will be the amount of consideration paid or payable for the sales during the given period. It also includes some other charges before delivery thereof but the interest or other finance costs shall not be considered as the same is not a consideration for sale.

Since the lease rentals are spread over the lease term therefore the taxable turnover is computed for each year separately and each year’s lease rental is only liable to VAT.

INTER-STATE LEASING

Lease of an asset in the course of inter-state or import trade cannot be taxed under state VAT law. VAT applies to sale inside a state only hence Inter-state leasing is not liable to VAT.

SUB-LEASE

Transfer of the right to use goods does not require that the goods should be owned by the person effecting such transfer. Therefore transactions of sub-lease are liable to VAT.

SALE OF LEASED ASSET AFTER LEASE PERIOD

Sale of a leased asset after the lease period is over is taxable in the same manner in which normal sale of such asset would have been taxed. Normally such sale is effected to the same lessee.

INPUT TAX CREDIT

INPUT TAX CREDIT ON PURCHASE OF LEASED ASSET

The tenure of the lease agreements is generally spread over a long period of time and lease rentals are collected over such lease periods therefore VAT liability is also spread over the lease-term. The lessor would have purchased the goods and must have paid VAT at the time of procurement of goods. The VAT paid on purchases is allowable as input-credit. The input-credit is to be utilised in instalments spread over the lease term. The lessor may carry forward the excess input credit instead of claiming refund from the tax authorities. However some states like Maharashtra have provided for immediate utilisation of such input tax credit against payment of any tax.

INPUT TAX CREDIT ON CAPITAL GOODS

The assets given on lease will be generally capitalized by the lessor in his books and will be treated as capital assets. Thus, provision relating to input tax credit on capital goods will apply. Vat paid on capital goods will be admissible as input credit either immediately or in monthly instalments (upto 36 instalments).

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com