A fresh lease of life

LEASING & HIRE PURCHASE

The Budget seeks to rectify anomaly by abatement of interest and instalments of principal in calculating value of service.

The Budget has proposed to rectify the anomaly in application of service tax on the Rs 22 187 crore leasing and hire purchase industry. The industry has been facing difficulty on account of the levy of service tax on all components of payments, including interest.

The 2006-07 Budget has proposed to rectify the anomaly by abatement of interest and instalments of the principal in calculating the value of the service.

The Budget is, however, silent on Indian Banks' Association's (IBA) demand that leasing and hire purchase be either considered as sale or service for the purpose of taxation.

The premier bankers' body had argued that leasing and hire purchase are already within the purview of value-added tax (VAT)/sales tax acts of respective states.

Most acts related to sales tax acts/VAT classify lease/hire purchase as instalment sales under respective acts and classifying them as services for the purpose of service tax amounts to double taxation on the same transaction.

The Finance Bill has also removed exemption accorded to cooperative banks from paying tax on their profits. Finance minister P Chidambaram said cooperative banks, like any other bank, are lending institutions and should pay tax on their profits.

However, primary agricultural credit societies and primary cooperative agricultural and rural development banks will continue to be exempt from tax under Section 80P of the Income Tax Act.

The government has brought National Bank for Agriculture and Rural Development, Small Industries Development Bank of India and National Housing Bank under the tax bracket from April 1, 2006 as it considers these as banks.

According to the finance minster, Nabard, Sidbi and NHB are banks and have already been provided with the route of zero-coupon bonds to raise low-cost funds. The government will, if needed, provide appropriate support to these institutions to enable them to access resources to fulfil their mandate effectively, the Budget stated.