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Vat rate on rented machinery

CA Ajit Gajera (Practicing Chartered Accountants) (124 Points)

25 January 2013

Dear Friends,

I want to know the rate of vat on machinery, which is given on financial lease and after end of lease period it is sold to lesee.

Also i want to know that on rent service tax is applicable or not, and if yes at what rate?

Thanks

Ajit Gajera

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4 Replies

Mr Subrata Dasgupta (Finance Professional) (171 Points)
Replied 25 January 2013

Dear Ajit there are two parts to your question involving two different statutes. viz Value Added Tax (VAT) and Service Tax.

Answering the First Part regarding VAT it differs from state to state. However, most of the state VAT Acts have made VAT applicable on "Right to use Goods" So State VAT is applicable on the Lease Value of the goods. I cannot be more specific as you have not mentioned the name of the State in which transaction is done.

Answering the Second Part of the query, Service Tax on rent shall be applicable if the threshold limit of Rs Eight Lacs is crossed. The rate will be 12.36% (12% Basic + 2% Edu Cess on Basic + 1% Secondary and Higher Education Cess on Basic). If the threshold limit is not crossed, then Service Tax shall not be applicable.

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CA Ajit Gajera (Practicing Chartered Accountants) (124 Points)
Replied 26 January 2013

Thanks Mr. Subrata,

The transaction will be in Gujarat, also i m bit confused that how can we tax rent by two taxes, i.e. vat and service tax?

Please Reply as soon as possible.

Thanks

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Mr Subrata Dasgupta (Finance Professional) (171 Points)
Replied 28 January 2013

Dear Ajit

"Right to use" is taxable under the Gujarat Value Added Tax Act 2003. The rate is the rate of tax on "Machinery" presently the rate is 4%VAT +1% Additional VAT = 5%.

Now coming to your confusion regarding two taxes on the same transaction. The "Right to use" has been made taxable by a fiction of Law. It is therefore construed as a Deemed Sale. As we all know that VAT is applicable on all transactions of sale. Similarly rent of an movable property is taxable under the Finance Act 1994 as amended and therefore Service Tax is applicable, but the point to be noted is that the value of such transactions during the year should exceed Eight Lacs.

The VAT is governed and administred by State Governments while Service Tax is governed and Administered by the Central Governemnt (Central Board of Excise & Service Tax). This is also the likely scenario under the fast approaching Goods and Service Tax, wherein some of the services shall be brought under the tax net and state governments shall administer the same.

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Mukund Kedia (Business Analyst) (25 Points)
Replied 02 July 2014

Dear Mr. Subrata,

Please correct me if I am wrong: Adding to your point on the Service Tax applicability on the Lease Rentals, Service Tax is applicable only on 10% of the Interest component of the Lease Rental @ 12.36%, as the interest amount is considered as the Servicing of lease equipment cost and the income to the Lessor.

Regards.