Report No. 61
1B.27. Constitutional dichotomy and complications resulting therefrom.-
At this stage, we should point out that there are certain constitutional complications attendant on a proposal for the levy of a tax on hire-purchase. A hire-purchase transaction is a composite transaction, made up of two elements, namely, (i) bailment or hiring; and (ii) sale which is not effected immediately. The amount paid by way of hire-purchase price under a hire-purchase agreement is, as pointed out by the Supreme Court,1 partly towards the hire and partly towards the payment of price.
1. K.L. Johar & Co. v. Deputy Commercial Tax Officer, AIR 1956 SC 1082 (1091).
1B.28. No legislative competence to tax 'sale' part.-
Now, in so far as the hire-purchase price represents the sale price also, Parliament has no legislative competence to impose any tax thereon, because of State List, entry 54. Parliament has legislative competence to levy a tax only in relation to the 'hire' part of the hire-purchase price, and not with reference to the 'sale' part of the price. Theoretically, the two could be treated separately, but, from a practical point of view, it would be difficult to determine what is the 'hire' part of the hire-purchase price (under a hire-purchase transaction) and what is the 'sale' part. The Supreme Court has suggested that there may be two ways of determining the 'hire' part and the 'sale' part involved in a hire-purchase price.
But, both the methods suggested by the Court involve, in substance, a splitting up. If the Union decides to levy a tax on the 'hire' part only, it cannot do so without splitting up. Similarly, if the States wish to tax the 'sale' part, they cannot do so without splitting up. It would, therefore, appear that the more convenient method would be to tax the composite price-after such constitutional amendment as is necessary. This will avoid an attack on the validity of the law on the ground that it amounts to an encroachment by Parliament into the sphere of 'sale', or an encroachment by the States into the sphere of 'hire'.
1B.29. Present dichotomy to be removed by amendment.-
Since the present constitutional position represents a dichotomy1 in the sense that tax on the hire part is within the competence of the Union only, and tax on the sale part is within the competence of the States only, it becomes necessary to amend the Constitution, so that the amendment will authorise levy of the entire tax by one legislative authority.
One alternative would be an amendment which authorises Parliament to levy a tax on hire-purchase, in which case, Parliament's existing residuary power to tax the 'hire' part (of the hire-purchase price) and the new power to be transferred to Parliament with regard to the 'sale' part of the hire-purchase price, will be merged, and this will enable Parliament to provide for a tax on hire-purchase transactions without the necessity of a demarcation between the 'hire' part and 'sale' part.
The other alternative would be to transfer the entire power to the States. This will achieve a merger of the existing power of the States to tax the 'sale' part and the new power (to be transferred) to tax the 'hire' part, and will enable the State Legislatures to provide for a tax on hire-purchase price without demarcation as aforesaid.
1. Para. 1B.28, supra.
1B.30. Effects of present dichotomy.-
The legal complications involved in a tax on hire-purchase, if the present dichotomy is maintained, may be again mentioned. The 'price' (in hire-purchases) is a composite one. Though, in one aspect, the instalments paid (or stipulated to be paid), represent the "hire" for the use of the vehicle, still they represent, in another aspect, the instalments of "price" payable as consideration for the transfer of title. If the transaction were one of pure "hiring" (i.e., without the sale element), the hirer would have paid much less. If the Union is to tax them, it cannot tax the 'sale' part. If the States are to tax them, they cannot tax the 'hire' part. That is the present position.
(a) If the tax is levied by Parliament on the actual instalments of hire-purchase and the sale materialises, then there may be a partial encroachment on the State List, entry 54. Where the hire-purchase transaction itself results, in sale, by the exercise of the option, a "sale" takes place of the goods which, till then, had been hired. As the Supreme Court has held1:
"When all the terms of the agreement are satisfied and the option is exercised, a sale takes place of the goods which till then had been hired. When this sale takes place, it will be liable to sales tax, for the taxable event under the Act is taking place of the sale. "
At the time when the hire-purchase transaction materialises in a sale-usually, on payment of the last instalment with or without some nominal optional money-sale in law and in fact has resulted, and the last instalment, since it passed the property in the goods, should be construed as effecting a sale. That, in fact, is the intention of the parties. It is really the price element that goes to add to what might strictly be called the hire, to yield the amount stipulated.
(b) If the method of taxing the actual instalments (whether the tax is levied on the total, or is levied every year) is not to be adopted, the only other alternative (where the sale materialises) is to resort to notional splitting up. The notional splitting up will separate the hire part from the sale part. This is, however, a cumbersome process.
Two questions of detail thus arise when a hire-purchase agreement leads ultimately to a sale, (1) whether sales tax could be levied at the inception of the contract of hire-purchase, or whether the taxing authority should wait till the option is exercised and the title passes, (2) what is the amount of consideration for which the sale, which takes place when the option is exercised, should be deemed to be effected.
1. K.L. Jokar v. D.C.T.O., (1965) 2 SCA 13 (25).
1B.31. Position if above dichotomy is not kept.-
If we abolish the dichotomy referred to above in regard to hire-purchase, the position would become less complicated, as the above difficulties would be avoided. The whole power to tax (intra-State) hire-purchase in the wide sense could be transferred:
(i) either to the Union with a provision for assignment of the proceeds to the State;1 or
(ii) to the States.
Which of the two courses should be adopted is a matter of policy. Our preference is for transfer of the power to the States, because in our view basically the entire transaction takes place in the State and the States should be given the power.
1. Article 269 of the Constitution would require to be amended, in this case.
1B.32. Conclusion and recommendation.-
In the light of the above discussion, our conclusions as to taxation of hire-purchase are as follows:-