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Report No. 61

Taxability of Hire-Purchase Transactions - Position In States

1B.9. Taxability of hire-purchase transactions.-

Taxability of hire-purchase transactions (under the power to levy a tax on the sale or purchase of goods) can be considered separately with reference to:-

(1) position as regards power of the States;

(2) position under the Central Sales Tax Act;

(3) position as regards the Union Territories.

1B.9A. Power of the States-Distinction between hire-purchase and sale.-

Hire-purchase (until its fructification in sale) is a mere bailment, and is not analogous to sale. Property may ultimately pass to the hirer; but that is problematic, and dependent on the volition of the hirer1. The essence of sale is the passing of property, which is absent in the case of hire-purchase (until its ultimate fruition). The hirer enjoys the use of the goods until determination of the agreement; but the title to goods still remains in the owner. It is because of this difference between hire-purchase and sale that the constitutional power of the States to levy a tax on the sale or purchase of goods2 has been construed as not including a hire-purchase which does not result in sale.3

If a hire-purchase results in sale, sales tax is undoubtably leviable by the States. No doubt, it is difficult to determine the "sale price" for the purpose of the sales tax law,4 but this has no bearing on the question of legislative competence.

1. Para. 1B.5, supra.

2. State List, entry 54.

3. K.L. Johar v. Dy. C.T.O., AIR 1964 SC 1082.

4. See para. 1B.26, infra.

1B.10. Position as summarised.-

The position as regards the power of States to levy a tax on hire-purchase can be briefly stated as follows:-

(a) The States cannot tax hire-purchase transactions not resulting in sale;1

(b) The States can tax hire-purchase transactions resulting in sale, but only to the extent to which the tax is levied on the sale price,2 the sale price in this case being a notional figure which has to be calculated according to the criteria legally permissible3.

It would appear that (as of 1966) the Sales Tax Acts of some States included, within the expression "sale", hire-purchase etc. with a non obstante clause. But this provision must be read as subject to what is stated above.

1. Para. 1B.9A., supra.

2. K.L. Johar v. Dy. C.T.O., AIR SC 1082.

3. Paras. 1B.25 and 1B.26, infra.

Certain Problems connected with Powers of the States to Levy a Tax on the Sale of Goods and with the Central Sales Tax Act, 1956 Back

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