Vat on lease in kerala
This query is : Resolved
29 October 2011
it is unethical to say no input credit on right to use asper sec 11(4). If there in no input and out put it is income tax not vat.
an example i purchased an item for Rs 1000 paid kerala vat of 40 and leased for Rs 100 i collected and paid Rs4 per month so a year Rs 48 + 40 =88 or 48-40=8 .In Vat duplication cannot be tolerated. Other way if the leessee think of buying insted of leasing he can utilise loan interest as expence depreciation and vat input. How to fight this in VAT before GST
an example i purchased an item for Rs 1000 paid kerala vat of 40 and leased for Rs 100 i collected and paid Rs4 per month so a year Rs 48 + 40 =88 or 48-40=8 .In Vat duplication cannot be tolerated. Other way if the leessee think of buying insted of leasing he can utilise loan interest as expence depreciation and vat input. How to fight this in VAT before GST
29 October 2011
Mr. Verghese,
You may note that in Kerala the tax on leasing is reduced to 4%, unlike in other states. This is similar to compounded rate oftax on works contract. On this reduced rate no input tax can be allowed. Take an example: A financing company buys a commercial vehicle say for Rs10 lakhs and pays VAT @ 12.5% i.e.Rs1.25 lakhs.Now the financier's cost is(including his margin and vat)Rs12 lakhs. He can collect tax @4% on the installment amount. He would collect Rs. 48,000/- as vat.Suppose he claims the input tax of credit of Rs1.25 lakhs,he will be gaining Rs77,000/-,which results in a loss to the government.If this provision of reduced rate of tax was not there I/P tax credir could have been allowed.The better way is to go for normal rates of vat even in leasing.
You may note that in Kerala the tax on leasing is reduced to 4%, unlike in other states. This is similar to compounded rate oftax on works contract. On this reduced rate no input tax can be allowed. Take an example: A financing company buys a commercial vehicle say for Rs10 lakhs and pays VAT @ 12.5% i.e.Rs1.25 lakhs.Now the financier's cost is(including his margin and vat)Rs12 lakhs. He can collect tax @4% on the installment amount. He would collect Rs. 48,000/- as vat.Suppose he claims the input tax of credit of Rs1.25 lakhs,he will be gaining Rs77,000/-,which results in a loss to the government.If this provision of reduced rate of tax was not there I/P tax credir could have been allowed.The better way is to go for normal rates of vat even in leasing.
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03 November 2011
Thank you for the information but i am not satisfied because there is duplication of KVAT since the vat suffered item is leased again. In service tax for car rental only 60 % is taxed , in our case it is not financing it is pure operational lease,we lease items under 3rd schedule and vat for the same in kerala is only 4 %,we incur expense like Maintainace cost int on loan and the cost.and in sales lease is treated as normal sale so vat cannot be objected only prohibited item are petrol ,diesel and liquor.it is better to include Right to use in that schedule
03 November 2011
IN KERALA VAT form 1 (application) there is a column Nature of business (and as) f. leasing but no where in the KVAT says about leasing . no bill format,How the treat accounts , how the party will account the bill and what is the process when the materials are returned is it sales return.
the rate of 4 % is not subsidence the items we sive is only 4 % and in vat why we should be a regular assesse we can compound at 0.5 % on if turnover which is less than 50 lack
the rate of 4 % is not subsidence the items we sive is only 4 % and in vat why we should be a regular assesse we can compound at 0.5 % on if turnover which is less than 50 lack
02 August 2025
This is a nuanced topic regarding VAT on leasing (right to use goods) in Kerala under the KVAT Act. Here’s a detailed summary and analysis based on your points and typical provisions:
---
### VAT on Leasing / Right to Use Goods in Kerala
1. **VAT Rate on Leasing in Kerala:**
* Kerala KVAT imposes a **reduced VAT rate of 4%** on leasing/renting of goods (operational lease), which is much lower than the normal VAT rates (often 12.5% on goods).
* This is a **composite or compound rate** to simplify taxation on leases.
2. **Input Tax Credit (ITC) Not Allowed on Leasing Transactions:**
* Section 11(4) of KVAT denies input credit on goods leased out at the reduced 4% rate.
* This is because allowing ITC on purchase of goods for lease, and charging VAT on lease rentals at 4%, would cause a loss to the government due to mismatch in tax collected vs tax credit claimed.
3. **Why ITC Denial is Controversial:**
* As you pointed out, if the lessor pays VAT at a higher rate on purchase (say 12.5%) but charges VAT at only 4% on lease rent collected, and **cannot claim ITC**, it appears like tax is paid twice: once on purchase, once on lease revenue.
* In contrast, if the lease was treated as a sale (normal sale VAT rate) ITC could be claimed and this mismatch would not happen.
* Also, there is an argument that leasing is akin to providing a service (right to use) and should be outside VAT, or treated differently.
4. **Difference Between Operational Lease and Financing Lease:**
* Operational lease: Lessor retains ownership, lessee just uses the asset; taxed at 4% without ITC.
* Financial lease (sale): Treated as sale with normal VAT, ITC allowed.
5. **KVAT Forms and Accounting Issues:**
* KVAT registration forms mention “Leasing” under business nature, but there is no specific detailed guidance on bill format, accounting treatment, or handling sales returns in leasing.
* This causes confusion in practical accounting and compliance.
6. **Your Concern:**
* Duplication of VAT burden as VAT paid on purchase (higher rate) is not credited while VAT charged on lease is low (4%).
* Operating expenses, interest on loans for asset purchase, and maintenance costs are not factored in VAT computations.
* Suggestion: Treat “Right to Use” as a separate category, possibly under service tax or integrated GST in future, to avoid this duplication and complexity.
---
### Possible Approaches / Recommendations
* **Go for Normal VAT Registration:**
Instead of compounding at 0.5%, opting for normal VAT registration and charging normal VAT rates on lease rentals can allow input credit and reduce tax cascading.
* **Maintain Clear Accounting:**
Maintain detailed records of leased goods, billing, VAT collected, and expenses incurred.
* **Future GST Impact:**
Under GST, “Right to Use” goods is treated as a supply of service, and input tax credit mechanism is more streamlined, which should resolve many issues currently faced under VAT.
* **Legal Consultation / Representation:**
If the VAT structure causes loss or is unfair, consultation with a tax expert for possible appeal or representation before the tax authorities may help.
---
If you want, I can draft a detailed note or reply regarding this issue for your internal use or communication with tax authorities. Would that help?
---
### VAT on Leasing / Right to Use Goods in Kerala
1. **VAT Rate on Leasing in Kerala:**
* Kerala KVAT imposes a **reduced VAT rate of 4%** on leasing/renting of goods (operational lease), which is much lower than the normal VAT rates (often 12.5% on goods).
* This is a **composite or compound rate** to simplify taxation on leases.
2. **Input Tax Credit (ITC) Not Allowed on Leasing Transactions:**
* Section 11(4) of KVAT denies input credit on goods leased out at the reduced 4% rate.
* This is because allowing ITC on purchase of goods for lease, and charging VAT on lease rentals at 4%, would cause a loss to the government due to mismatch in tax collected vs tax credit claimed.
3. **Why ITC Denial is Controversial:**
* As you pointed out, if the lessor pays VAT at a higher rate on purchase (say 12.5%) but charges VAT at only 4% on lease rent collected, and **cannot claim ITC**, it appears like tax is paid twice: once on purchase, once on lease revenue.
* In contrast, if the lease was treated as a sale (normal sale VAT rate) ITC could be claimed and this mismatch would not happen.
* Also, there is an argument that leasing is akin to providing a service (right to use) and should be outside VAT, or treated differently.
4. **Difference Between Operational Lease and Financing Lease:**
* Operational lease: Lessor retains ownership, lessee just uses the asset; taxed at 4% without ITC.
* Financial lease (sale): Treated as sale with normal VAT, ITC allowed.
5. **KVAT Forms and Accounting Issues:**
* KVAT registration forms mention “Leasing” under business nature, but there is no specific detailed guidance on bill format, accounting treatment, or handling sales returns in leasing.
* This causes confusion in practical accounting and compliance.
6. **Your Concern:**
* Duplication of VAT burden as VAT paid on purchase (higher rate) is not credited while VAT charged on lease is low (4%).
* Operating expenses, interest on loans for asset purchase, and maintenance costs are not factored in VAT computations.
* Suggestion: Treat “Right to Use” as a separate category, possibly under service tax or integrated GST in future, to avoid this duplication and complexity.
---
### Possible Approaches / Recommendations
* **Go for Normal VAT Registration:**
Instead of compounding at 0.5%, opting for normal VAT registration and charging normal VAT rates on lease rentals can allow input credit and reduce tax cascading.
* **Maintain Clear Accounting:**
Maintain detailed records of leased goods, billing, VAT collected, and expenses incurred.
* **Future GST Impact:**
Under GST, “Right to Use” goods is treated as a supply of service, and input tax credit mechanism is more streamlined, which should resolve many issues currently faced under VAT.
* **Legal Consultation / Representation:**
If the VAT structure causes loss or is unfair, consultation with a tax expert for possible appeal or representation before the tax authorities may help.
---
If you want, I can draft a detailed note or reply regarding this issue for your internal use or communication with tax authorities. Would that help?
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