Hire-purchase and GST ACT

A. Introduction

Hire-purchase is one of the modes of financing `an asset. “It is a system whereby the owner of goods lets them on hire for periodic payments by the hirer upon an agreement that when a certain number of payments have been completed, the absolute property in the goods pass to the hirer, but so that the hirer may return the goods at any time without any obligation to pay any balance of rent accruing after return, until the conditions have been fulfilled, the property remains in the owner.” [Jowitt’s Dictionary of English law, 2^nd edition]. To cover this type of transactions, the Hire Purchase Act, 1972 was enacted by the Parliament of India. This Act was to come into force on 1^st June,1973, vide GSR 222(E) dated 30^th April, 1973, but this notification was rescinded by G. S. R. 288 (E), dated 31- 5- 1973 and the Act was made effective from 01-09-1973 but this notification was also rescinded by G. S. R. 402 (E) dated 30- 8- 1973. Later this Act is repealed by Act 31 of 2005.The Hire Purchase Act, 1972 basically did not create / or bring into existence ‘the form of sale by Hire Purchase’ but was merely intended to define and regulate the rights and duties of the parties to hire-purchase. There is at present no separate and specific law with respect to hire-purchase. Subject to the general provisions of the general law as to contract and sale of goods contained in the Indian Contract Act, 1872 and Sale of Goods Act, 1930, hire-purchase transactions are governed entirely by the terms and conditions of the agreement between the owner of the goods and hirer. Though repealed, the provisions of the said Act are still pertinent to understand the nature of Hire-purchase transaction.

B. Hire-purchase agreement

According to the Hire Purchase Act, 1972, “Hire-purchase agreement” means an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which

(i) Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and

(ii) The property in the goods is to pass to such person on the payment of the last of such installments, and

(iii) Such person has a right to terminate the agreement at any time before the property so passes;

As a consequence, a Hire purchase agreement has two elements:

(I) Element of bailment

(II) Element of sale in the sense that it contemplates eventually sale when the intending purchaser fulfills the terms and conditions of the Hire purchase agreement.

Hire-purchase agreements are executory contracts under which the goods are let on hire and the hirer has an option to purchase in accordance with the terms of the agreement.

Though it has an element of sale, Hire Purchase is a distinct transaction from outright sale. The fundamental nature of a transaction of sale is that property in goods i.e. ownership of goods is transferred immediately from seller to purchaser. It is immaterial whether this price is paid in full or in installments: if the transfer of possession is accompanied by the transfer of property in goods then the transaction is one of sale, whether immediately or in installments. The distinguishing feature of a typical hire-purchase agreement is that property in the goods does not pass when the agreement is made but only passes when the option to purchase is finally exercised in compliance with all the terms of the agreement.

In Damodar Valley Corporation v. State of Bihar, [1961 AIR 440, 1961 SCR (2) 522] the Hon’ble Supreme Court laid down certain tests to determine whether an agreement to be one of hire-purchase as opposed to sale:-

I. Whether there is a binding obligation upon the hirer to purchase the goods.

II. Whether there is a right reserved to the hirer to return the goods at any time during the subsistence of the contract.

It was held that if there was no binding obligation and such right was reserved, then there was no contract of sale but rather, a hire-purchase agreement. In the same case, it was stated that such an agreement confers no title upon the hirer, but a mere option to purchase based on the fulfillment of certain conditions.

It is also different from lease agreement. The main differences are—

I. in a lease agreement ownership is never transferred from the lessor to lessee whereas in a Hire-purchase agreement, the ownership is transferred after payment of the last installment.

II. In case of operating lease, depreciation is claimed by lessor, whereas in case of hire-purchase depreciation is claimed by hirer.

III. In case of operating lease, lease rent is expenditure for lessee, whereas in case of hire-purchase only interest is considered as expenditure while the principal amount is the cost of assets.

As this hire-purchase system has gained popularity, another version of this scheme becomes in vogue. Initially, hire-purchase represented a two-party transaction between the owner and the hirer or intended purchaser. Another variation arises when a financier plays a pivotal role between the owner of the goods and the hirer. Many sellers have no wish to act as financiers themselves by supplying credit to hirer. Consequently, a hire-purchase transaction often involves first, a sale under which the seller sells the goods to a finance company, and then secondly, a hire-purchase contract under which the finance company lets the goods on hire-purchase terms to the hirer/intended purchaser. Therefore, the hirer has no real contractual relations with the seller. Similarly, the seller is not required to look to the hirer/intending purchaser of goods to recover the balance of the price; the financier may pay the balance and undertake recovery. In this form, goods are purchased by the financier from the seller, who then obtains a hire-purchase agreement from the hirer/intending purchaser under which the latter becomes the owner of the goods on payment of all the installments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. In case of ‘Hire-purchase finance’, the financing is done by the finance company. In such cases, the hirer (purchaser) becomes owner of the goods. The finance company is never the owner of the goods. It has only right to seize the goods for non-payment of loan. Basically this is not ‘hire-purchase’ rather it is ‘hire-purchase finance’.

C. PROVISIONS UNDER GST ACT

For GST purposes it is necessary to classify correctly the agreement involving the hire, lease, or bailment of goods. The classification of an agreement as a “hire purchase agreement”, an “agreement to hire” or as being outside those ambits, affects the GST treatment of the agreement and consequently the GST liability. The way the ‘supply’ has been defined in the GST Act is very wide. The legislative intention is clear. The legislature, with its profound wisdom, has not wanted any transaction to be escaped from the supply-ambit and that’s why it has used the word” includes”. The definition of ‘supply’ is all encompassing. The definition of ‘supply’ in section 7 of the CGST ACT, 2017 specifically includes eight classes of transactions: – sale, transfer, barter, exchange, licence, rental, lease or disposal apart from import of services for a consideration whether or not in the course or furtherance of business and the activities specified in Schedule I, made or agreed to be made without a consideration.

There are different aspects that discriminate each of these eight forms of supply. Interestingly hire-purchase has not been mentioned in the definition, though in no way it will be an impediment to bring the transactions under ‘hire-purchase system’ within the supply -network under GST Act.

For a transaction to be a supply of goods, both the title and possession of goods have to be transferred.

Any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services in terms of Para (1) (b) of Schedule II of the CGST Act, 2017.

Any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods [Para (1) (c) of Schedule II of the CGST Act, 2017]. The supply of goods on hire-purchase shall be treated as supply of goods as there is transfer of title, albeit at a future date.

D. TIME OF SUPPLY  

The taxable event under GST is supply but the liability to pay tax on goods shall arise at the time of supply, as determined in accordance with the provisions of section 12. The time of supply is not a fact that is to be decided by the supplier or by the recipient. On the contrary, it is a legislative device that should be operative. ‘Time of supply’ is what the legislature has stipulated as the ‘time of supply’. A conjoint reading of relevant portion of section 12 and section 31 may be helpful. Relevant portion is extracted below-

Section 12 (1) ……….. (2)   The time of supply of goods shall be the earlier of the following dates, namely:— (a) the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply; or  (b) the date on which the supplier receives the payment with respect to the supply:   Provided that where the supplier of taxable goods receives an amount up to one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice in respect of such excess amount.  Explanation 1.––For the purposes of clauses (a) and (b), “supply” shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment. Explanation 2.––For the purposes of clause (b), “the date on which the supplier receives the payment” shall be the date on which the payment is entered in his books of account or the date on which the payment is credited to his bank account, whichever is earlier.  Section 31  (1) A registered person supplying taxable goods shall, before or at the time of,— (a) removal of goods for supply to the recipient, where the supply involves movement of goods; or (b) delivery of goods or making available thereof to the recipient, in any other case,  issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed:   Provided that the Government may, on the recommendations of the Council, by notification, specify the categories of goods or supplies in respect of which a tax invoice shall be issued, within such time and in such manner as may be prescribed. (2) A registered person supplying taxable services shall, before or after

Now, the question arises what is the time of supply in case of hire-purchase.

As already discussed, in this system first, there is bailment of goods i.e. there is voluntary transfer of possession, along with right to use and later on, the title is passed upon fulfilling all the terms and conditions. For a transaction to be a supply of goods, both the title and possession of goods have to be transferred. Then what is the time of supply- the time of bailment or the time of periodic receipt of hire-charges or the time of transferring title?

There is no specific provision for time of supply in case of hire-purchase. The generic legislative prescription of time of supply is the earlier of the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice or the date of receipt of payment.

The central government on the recommendations of the GST Council has notified the registered persons (who have not opted for composition levy) as the class of persons who shall pay GST on outward supply of goods at the time of supply specified in clause (a) of sub-section (2) of Section 12 [Notification No. 66/2017 – Central Tax; New Delhi, the 15th November, 2017]. Thus, in respect of supply of goods by normal registered persons (other than composition dealers), the time of supply will be the issue of invoice (or the last date by which invoice has to be issued in terms of Section 31) Therefore, all taxpayers (except composition taxpayers) are exempted from paying GST at the time of receipt of advance in relation to supply of goods. So, effectively the entire GST shall be payable only when the invoice is issued for such supply of goods.

Date of issue of invoices forces us to look into the section 31 which contemplates two situations namely–

I. where the supply involves movement of goods; issuance of      invoice should be before or at the time of removal of goods for supply to the recipient

    or

II. In other case (where the supply does not involve movement of goods); issuance of invoice should be before or at the time of delivery of goods or making available thereof to the recipient

Whereas, the expressions ‘removal of goods’, used in Section 31 has been defined in Section 2(96) of the CGST Act, 2017, ‘movement of goods’ has not been defined in the Act.

“removal’’ in relation to goods, means—  (a) despatch of the goods for delivery by the supplier thereof or by any other person acting on behalf of such supplier; or (b) collection of the goods by the recipient thereof or by any other person acting on behalf of such recipient;

“Removal in relation to goods” is a factual state when the goods are stipulated to be shipped from the place of business of the supplier or to be collected by the recipient, when the supply of goods is contemplated. ‘Movement of goods’ is one of the circumstances of the goods when it is being supplied to the recipient.

So, when the supply involves movement of goods, the invoice should be issued before or at the time of removal of goods for supply to the recipient. In case of hire-purchase, generally, there is movement of goods. And therefore legally the date of issuance of invoice should be ‘before or at the time of removal of goods’ for supply to the recipient, where the supply involves ‘movement of goods’ and it should be the time of supply in terms of section 12.

Another question arises how the tax will be calculated on the value of supply in case of hire-purchase. Whether the GST will be charged –

I. On the periodic payment [hire charges are broken into two   parts (a) principal (b) interest]; or

II. On the consolidated amount at the time of agreement; or

III. On the consolidated amount when the title is transferred.

The law seems to be silent in this regard. But it is always safe to discharge the tax liability when the goods are supplied to the hirer in accordance with the hire-purchase agreement, irrespective of periodic receipt of payment or the time of passing the title or any untimely termination of agreement. Though when full payment is made, any premature termination will result a refund of tax.

E. Conclusion

There are three basic methods to analyse a hire purchase agreement conceptually. Each method emphasises a different dimension of hire purchase’s multi-faceted character. The first method emphasises the installment purchase dimension. The second emphasises its hire dimension. And the third emphasises the involvement of a financier in the transaction.

The GST legislation seems to take a combined approach of the first and third method. The legislation treats a hire -purchase agreement as a sale, and financing part as a service by way extending loan. Whereas the use of goods is a continuous process and a progressive supply, legally the hire-purchase is deemed to be a single supply by way of sale. The GST treatment of hire purchase is not a simple matter. In fact, it is bedevilled by certain uncertainties. Those uncertainties are largely a function of the nature of hire purchase agreements and the seemingly absence of a clear legal provision to the treatment of hire purchase agreements.

N.B. Opinion is strictly personal.