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Applicability of vat and service tax

vijeesh V R (CA Final) (91 Points)

04 May 2012

Whether we have to charge VAT or Service tax on materials given for Operating Lease ?

Pls Clarify

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Sunil Kumar G (AGM Taxation) (373 Points)
Replied 04 May 2012

Like for all sales, for all local lease/HP transactions, VAT will be applicable.

Since lease/HP are sales, the goods bought for the purpose of lease/HP are clearly “inputs”. They are inputs not as capital goods, but as goods bought for the purpose of resale.

The input tax paid on purchase will be allowed to be set off against the tax payable on rentals/receivables. As is easy to understand, the tax payable on the receivables is computed only on the receivables maturing during the year, while the tax paid on input is paid on the purchase price. Therefore, it would be possible to defer the actual tax outflow depending on the growth rate of the leasing portfolio.

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vijeesh V R (CA Final) (91 Points)
Replied 08 May 2012

Dear sir,

As it is an operating lease we will get back the materials after Lease period, and also as the materialsare getting back it is not considered as a sale as per sale of goods act.

Whether we can treat it as a service for whole amount and charge only service tax.

Please clarify

Sunil Kumar G (AGM Taxation) (373 Points)
Replied 08 May 2012

After operating lease, you will get back material is not sale under under Sale of goods Act, that i am agree with you, and there is no tax. During the lease period what ever you are collecting, its a deemed sale under VAT Act and charged accordingly VAT. No Service Tax is applicable.

vijeesh V R (CA Final) (91 Points)
Replied 08 May 2012

Dear sir,

We are showing leased materials as current assets(Stock with customers) as per books.

Then how we can charge VAT on the amount.

Please Clarify.

Sunil Kumar G (AGM Taxation) (373 Points)
Replied 08 May 2012

Materials are your asset only, but you are collecting lease rental/ lease amount, VAT is calculated on lease rental/ lease amount.

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vijeesh V R (CA Final) (91 Points)
Replied 08 May 2012

Dear Sir, Is there any relevant case laws or notification regarding the applicability on VAT on Lease Rentals.

Sunil Kumar G (AGM Taxation) (373 Points)
Replied 08 May 2012

Please refer Essar Telecom Infrastructure (P.) Ltd. Versus Union of India. 2011 -TMI - 204780 - KARNATAKA HIGH COURT Other Citation: 2012 (25) S.T.R. 16 (Kar.) , 2012 (275) E.L.T. 167 (Kar.)

Highlight of the case

Facility of providing mobile telephone towers for various service provider - Referring to various judgments of the Apex Court and other courts, petitioner's counsel contended that petitioner has already remitted the entire service tax due to the Centre. Directing the petitioner to pay tax as per section 2(29)(d) of the VAT Act is impermissible and also it would be in the form of double jeopardy - the petitioner has leased out the towers to cellular operators in the form of transfer of rights to use the goods and the superstructure which cannot be easily dismantled without damage but, can be reinstalled elsewhere - having regard to the nature of the agreement entered into and the nature of transaction, the effective control is with the petitioner and, the component of delivery is also involved and the maintenance and over all control is also with the petitioner, it could be specifically said that the right to use the goods has been transferred by the petitioner to the telecom companies and that very much falls within Article 366(29A)(d) of the Constitution - Held that: - the right to use the goods has been transferred by the petitioner to the telecom companies and that very much falls within Article 366(29A)(d) of the Constitution. - VAT is applicable - State government can recover amount from central government - For the assessment years in question, the amount is paid by the petitioner to the 1st respondent and it is for the State to seek for recovery of the amount so paid by the petitioner to the 1st respondent in a separate proceedings based on the judgment rendered herein. Further, in future, it is for the petitioner to file returns/assessment under the provisions of sections 3 and 4(1b) of the VAT Act, 2003 - Petition is allowed partly.

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