Interest Tax Bonanza For Fis, Nbfcs

Financial institutions and non-banking financial companies are set to reap a bonanza with the Central Board of Direct Taxes deciding to exempt them from paying interest tax on their hire purchase transactions.

At present, FIs have to pay a 2 per cent interest tax on the chargeable income, while others have to pay 3 per cent.

NBFCs which will benefit from this exemption include Sundaram Finance and Tata Finance, whose main line of business is asset financing through hire purchase and lease transactions. FIs too will benefit to the extent of their hire purchase portfolios.

Till now, the CBDT had been treating hire purchase and loan transactions at par. As a result, companies were forced to pay interest tax on hire purchase transactions. NBFCs had been arguing that the two should be differentiated and hire purchase transactions exempted from interest tax.

 

The CBDT has also directed assessing officials that in case of transactions, which are in substance in the nature of hire purchase, the receipts of hire charges would not be in the nature of interest. Further, the board has said the assessing officer should take into account facts and circumstances like the nature of agreement between the supplier of the asset, the hire purchase company and the end-user of the asset.