Input tax credit on lease transaction of Vehicles

Clarification dated 22nd March, 2006 bearing distinctive number CTS-16/2005/483 issued from Authority at Kar Bhawan, Guwahati has been brought to my knowledge for academic discussion. The clarification is relating to eligibility of Input Tax Credit on Vehicles which are used for leasing (transfer of right to use). After referring to the provisions of section 14(6)(f) and the seventh schedule of the Act, it has been clarified that Input Tax Credit is not allowable to the dealer on purchase of vehicles even if such vehicles are used by him for leasing (transfer of right to use) business.

The above clarification is mainly based on the ground that ‘Vehicle’ is enumerated in the negative list (seventh schedule) and as per the provisions of section 14(6)(f) I.T.C. is not allowed on purchase of capital goods specified in the Seventh Schedule. The best part of this clarification is that it had not restricted the ITC on other Capital goods purchased for transfer of right to use of goods.

By 46th amendment in the Constitution, clause 29A was inserted in Article 366 and the meaning of the term “tax on the sale or purchase of goods” has been stretched to include tax on few deemed sales in its ambit. At the end of this sub-clause, it has been specified that “and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made”.

Thus, the clause 29A, which has empowered the States to levy tax on the transfer of the right to use any goods for any purpose for cash, deferred payment or other valuable consideration also specifies that such transfer or delivery of goods shall be deemed to be a sale of such goods. In the instant case of the transfer of right to use of vehicle, there is a deemed sale of ‘vehicle’. Accordingly for the purpose of taxation under the Assam Value Added Tax Act, 2003, it can be said that when there is a transfer of right to use motor vehicles in a leasing agreement, there is a resale of those vehicles in an unmodified form and thus ITC may be allowed on purchase of such vehicles under section 14(3)(a).

I don’t think it will be reasonable to treat the vehicle as tradable goods for the purpose of levying of taxes and to treat the same as capital goods for the purpose of disallowing the benefit of Input Tax Credit.

Opinions of esteemed readers are awaited on this issue........