Hire-purchase and installment sales: when tax is payable

Selling goods on hire-purchase or in installments spreads the customer's payments over months, and the intuitive assumption is that the sales tax spreads with them. It does not. The Sales Tax Act fixes the tax point by reference to the supply, not the payment schedule — and hire-purchase has its own specific rule. Getting the timing right keeps a big output-tax liability from being under-declared at the start.

Hire-purchase: tax at the agreement

For a supply of goods under a hire-purchase agreement, the time of supply is when the agreement is entered into. This is a specific rule, distinct from the ordinary delivery-or-payment test that applies to most goods. Its effect is significant: the sales tax on the value of the goods is accounted for up front, at the point the agreement is signed — not spread across the installments the customer will pay over the term. So a business writing hire-purchase deals cannot treat each monthly receipt as carrying its slice of tax; the whole output tax on the goods crystallises at the outset. The financing element — the interest or mark-up built into the installments — is a separate matter from the tax on the goods themselves.

Ordinary installment (credit) sales

An ordinary credit or installment sale — where ownership passes to the buyer at the point of sale and they simply pay the price over time — is a normal supply of goods. Its time of supply is the ordinary one: the delivery (or an earlier payment), on the full value. Again, the tax is not staggered across the payments. The installment plan is a financing arrangement layered on top of a single supply; it changes when the seller gets paid, not when the sales tax attaches. So whether the deal is hire-purchase or a plain credit sale, the common thread is that the output tax on the goods generally lands up front, not payment by payment.

Telling the two apart

The two structures differ in when ownership passes. In a credit sale, ownership passes at the sale and the buyer owes the balance. In hire-purchase, the customer hires the goods and only acquires ownership on the final payment or by exercising a purchase option. They are financed and documented differently, and defined differently for the time-of-supply rule — but for the practical question of when the tax on the goods is due, both bring it into charge early rather than over the term. The distinction matters more for the legal character of the deal and the financing than for deferring the sales tax.

Common mistakes

• Spreading output tax across the installments instead of accounting for it up front.
• Treating a hire-purchase supply under the ordinary delivery rule rather than the agreement-date rule.
• Confusing the financing mark-up on the installments with the tax on the goods.
• Under-declaring the opening period in which the agreement or sale actually occurred.

Where it fits

Hire-purchase timing is the counterpart to the advance-payment rules — both are about pinning the tax point precisely — and it sits close to renting and leasing goods, which is treated very differently as a service. It feeds straight into what you declare on each return and how you account for output tax. Tax the supply when it happens, not as the money arrives.

Sources

This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.

• Sales Tax Act 1990, amended through 30 June 2026 (FBR)
• Sales Tax Basics (FBR)

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