Lessors Get A Breather On Service Tax

Leasing and hire purchase companies do not have to pay the service tax on their interest income -- for the time being.

The Association of Leasing and Financial Services Companies (AL&FS) has managed to get a stay in the Madras High Court against the central government diktat of five per cent service tax, said Mahesh Thakkar, executive director of the association.

The association had filed a writ petition with the high court last month against the levy.

"We have been protesting against this since the announcement in the Union Budget," Thakkar said, adding it is unconstitutional to impose tax on leasing and hire purchase companies as they are already subjected to sales tax.

The service tax on leasing and hire purchase, effective from July 16, 2001, is on the interest portion of the leasing income as well as the initial management fees.

Since it was a prospective ruling, there was no tax on income from deals entered into before July 16.

On July 9, representatives of the leasing and hire purchase companies met the finance ministry and put forward their demand for removal of service tax on their interest income. They, however, agreed to pay the tax on management fees.

But their effort went in vain, following which AL&FS filed the writ petition in the Madras High Court.

"The leasing companies already work on very thin margins and hence we had to transfer the burden of the tax on the customers which could in effect hurt the income of the companies to a great extent," Thakkar said.

According to the leasing and hire purchase companies, non-banking finance companies (NBFCs) would be mostly hurt as banks could offer loan, guarantee or letter of credit in lieu of the lease offer.

Whereas under the current Reserve Bank of India regulations, NBFCs are not allowed to offer loan, guarantee or letters of credit.

The leasing and hire purchase companies are already reeling under the slowdown in the economy.

Income from leasing and hire purchase dipped by 8.5 per cent in the first quarter of the current financial year compared with the corresponding period of the previous financial year. The service tax could signal a death-knell for the industry, leasing firms feared.