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GST on Hire Purchase Transaction

Hire purchase is a system by which a buyer pays for a product in regular instalments while enjoying the possession of it. Initially, the title (ownership) of the product does not pass to the buyer, however, on full payment of all the installments, the title passes on to the buyer.

Applicability of GST on Hire Purchase Transaction

In order to understand GST implications under hire purchase transactions, we have to first analyze whether hire purchase transactions are covered within the definition of supply. Schedule II of CGST Act pertaining to activity to be treated as supply of goods or supply of services contains the following in section (c):

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.

Under a hire purchase transaction, ownership of the goods will pass on to the buyer on payment of last instalment. Hence, GST is applicable on hire purchase transaction as its covered under entry 1 (c) of Schedule II of CGST Act.

In a hire purchase transaction, since GST is applicable, the seller has to charge GST on the full value of the goods when he issues the invoice for the first instalment or when first instalment is paid, whichever is earlier.

GST on Interest Charged

In a hire purchase transaction, interest is typically charged as a part of the transaction, as the purchaser makes payment over a period of time. GST on interest would not be applicable based on the handing of interest in the GST invoice as follows:

Interest Charged Separately

In cases where interest amount is separately charged, GST is not payable on the interest amount.

Interest Not Charged Separately

In cases where interest amount is not separately charged, GST is payable on the interest amount.

Conclusion

Hire purchase transactions are supply of goods as per provisions contained in schedule II and hence GST is payable on the same. Further, with regard to payment of GST on interest amount, it has been clarified vide notification no. 12/2017-CGST (Rate), that if the interest is separately mentioned than GST is not payable, however, if the interest amount is not separately mentioned than GST is payable on entire amount including interest.