Service Tax On Equipment Leasing And Hire-Purchase - Whether Un-Constitutional ?

Surender Kumar Jain

This article makes a comprehensive analysis of the decision of the High Court in Kerala Non-banking Finance Companies Welfare Association v. Union of India [2009] 20 STT 1, wherein a recent issue as to : whether charging of service tax on banking and other financial services which include equipment leasing and hire-purchase, is unconstitutional, has been considered.

1- Vide section 137 of the Finance Act, 2001 service tax is introduced on ‘Banking and other financial services' which include ‘equipment leasing and hire-purchase'. The impugned provisions providing for service tax on ‘Equipment leasing and hire-purchase transactions' are introduced by amending the Finance Act, 1994. The relevant definition of ‘Banking and other financial services' is contained in clause (12) of section 65 of the Finance Act, 1994. Along with the introduction of the definition of ‘Banking and other financial services', the charging section, namely, section 66 of the Finance Act, 1994 is also amended to cover tax on value of taxable services referred to in sub-clause (zm) of section 65(105). The question as to whether charging of service tax on ‘Banking and other financial services', which include equipment leasing and hire-purchase, is unconstitutional, arose for consideration of the Kerala High Court in the case of Kerala Non-Banking Finance Companies Welfare Association v. Union of India [2009] 20 STT 1.

2 - The petitioner No. 1, an association of non-banking financial companies, which was covered under the definition of ‘Banking and other financial services', and its two members, viz., petitioner Nos. 2 and 3 had filed a writ petition challenging the constitutional validity of the impugned provisions of section 137.

3 - These are discussed as under :

(a) - The Parliament has no authority to legislate on hire-purchase and leasing transactions which are subjects left for levy of sales tax by the States under entry 54 of List II of the Seventh Schedule to the Constitution of India.

(b) - After the 46th Amendment to the Constitution introducing clauses (29A)(c) and (d) to article 366, States are authorised to provide for sales tax among other things on hire-purchase and leasing transactions.

(c) - As a follow-up measure, all the States including the State of Kerala introduced provisions in the respective Sales Tax Acts authorising levy of sales tax on hire-purchase and leasing transactions.

(d) - Impugned provisions for levy of service tax on hire-purchase and leasing transactions are discriminatory and violative of articles 14 and 19(1)(g) of the Constitution.

4 - These are as follows :

(a) - Even though service tax is payable on the value of taxable service pertaining to leasing and hire-purchase transactions, the Government of India had vide Notification No. 4/2006-ST, dated March 1, 2006 granted exemption on 90 per cent representing interest income earned by the service provider.

(b) - The Supreme Court had upheld the legislative competence of the Parliament to levy service tax under the residuary entry 97 to List I of the Seventh Schedule in the decisions in Tamil Nadu Kalyana Mandapam Association v. Union of India [2006] 4 STT 308, C.K. Jidheesh v. Union of India [2005] 2 STT 242 and Gujarat Ambuja Cements Ltd. v. Union of India [2005] 1 STT 41 and thereafter, through constitutional amendments entry 92C to List I of the Seventh Schedule and article 268A are introduced expressly giving authority to the Parliament to legislate on service tax.

(c) - The validity of legislation and the grievances of the petitioners should be considered with reference to the aforesaid Notification No. 4/2006-ST, dated March 1, 2006, by which rigour of the levy was neutralized by granting exemption on 90 per cent of the charges received in the hire-purchase and leasing transactions, thereby completely excluding interest on loans from service tax.

5 - It is well-settled that the Constitution by virtue of the provisions contained in article 366(29A) authorises, levy of sales tax on hire-purchase transactions and on leasing of goods and based on the same there is State legislation authorising it.

6 - The legislation applies to all engaged in banking and other financial services and is not confined to members of the first petitioner. In fact, banking companies in the public Sector are also liable to pay service tax on financial leasing service including equipment leasing and hire-purchase . Since the petitioners had not established the parties engaged in the same business who were left out and how they were discriminated, the contention was to be rejected. Similarly provisions of service tax do not take away or create any unreasonable restriction on the fundamental rights of the members of the first petitioner including petitioner Nos. 2 and 3 to carry on business. Therefore, the allegation of violation of article 19(1)(g) also, did not merit consideration.

7- There is no conflict between the levy of sales tax on the sale or deemed sale of vehicle under the hire-purchase agreement and the service tax payable on services rendered by the financier under the hire-purchase agreement. The provisions contained in article 366(29A) of the Constitution authorising levy of sales tax on the supply of goods under the hire-purchase agreement does not stand in the way of the Parliament levying service tax on taxable service charges received in respect of hire-purchase transactions by the financiers.
It is obvious that levy of sales tax is possible on sale of goods involved in the transactions while service tax can be levied on the service charges received in the transactions. Further, the provisions pertaining to levy of service tax on hire-purchase or lease transactions are not in any way different from the service tax authorised for the large number of transactions under the Finance Act, 1994, the constitutional validity of which is upheld by the Supreme Court. Since incidence of service tax is not on sale of goods or deemed sale of goods pertaining to leasing and hire-purchase transactions covered by clauses (c) and (d) of article 366(29A), the Parliament has authority to authorise levy of service tax on banking and other financial services including equipment leasing and hire-purchase.

Impugned provisions of levy of service tax on hire-purchase and leasing transactions are not discriminatory and violative of articles 14 and 19(1)(g).

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