VAT Guide to Value Added Tax - sri lanka inland revenue ...

Chapter – 17
Hire Purchase Transactions & VAT
17.1 Hire purchase agreement means an agreement under which goods are sold and
i. the possession of goods is delivered by the owner to a person on condition that
such person pays an agreed amount in periodical installments : and
viii. either the property in goods will be passed to the hire -purchaser on the payment
of the last installment or an option to purchase the goods can be exercised in
accordance with the terms of the agreement.
17.2 The VAT treatment of a hire-purchase conditional sale or a credit sale transaction is
based on the premise that unlike in the case of a lease transaction where only the
possession of goods passes to the lessee while the ownership remains with the lessor, in
the case of a hire-purchase conditional sale or a credit sale both the possession and the
ownership in goods passes to the hire-purchaser. Thus for VAT purposes an hirepurchase
conditional sale or a credit sale is treated as having two components namely
(i) Supply of goods and
(ii) Supply of a financial service
Thus the total consideration in the invoice pertaining to a hire-purchase transaction may
have a “cash price” component and a “hire-purchase charges” component. The hirepurchase
charges component is in effect a finance charge. If the hire-purchase charge is
not separately disclosed to the customer the total consideration is treated as the cash
price of goods.
i. The “value of supply” in the “supply of goods” component, as explained in para
3.8(5), is the cash price of goods determined in accordance with the provisions of
the Consumer Credit Act No. 29 of 1982 or the market value of goods,
whichever is higher, in the case of new goods. If they are second hand goods
(i.e if they have been used in Sri Lanka for more than 12 months) then the value
of supply is the value as per agreement less hire-purchase charges. The hirepurchase
company should charge VAT on this value at the rate applicable to the
particular goods. If the goods belong to 20% category (Eg. Television, motor
cycle) then 20% of the value of supply as computed above should be charged as
VAT. If the goods belong to 10% category (Eg. Computers, refrigerators, airconditioners)
then 10% of the value of supply should be charged as VAT. If the
goods are exempt as per First Schedule to the VAT Act supply of goods
component in a hire-purchase sale will be exempted from VAT.
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