LEASING

DEFINITION A lease is a contract whereby the owner of an asset (the lessor) grants to another person (the lessee) exclusive right to use the asset for an agreed period of time, in return for the payment of a rent (called lease rental). Capital assets like land, buildings, equipments, machinery, vehicles are the usual assets which are generally acquired on lease basis.The lessor remains the owner of the asset, but the possession and economic use of the asset is vested in the lessee

Main Elements of LeasingValid Contract of Leasing Delivery of GoodsPurposeConsiderationReturn of the GoodsOwnership

TYPES OF LEASE AGREEMENTS

Financial LeaseIn case of a financial lease, the lessor remains the owner of the leased asset during the lease period, but does not undertake its necessary maintenance.The rental received by the lessor fully amortises the cost of the equipment and earns a profit for him.These leases are non-cancellable.Ultimately, the ownership of the leased asset may be transferred to the lessee at an agreed price.

The lessor thus acts as a financier only and earns a return on his investment in the leased asset by way of rentals. Financial leases are for the major part of the useful life of the asset.

Operating LeaseAn operating lease stands in contrast to the financial lease in almost all aspects.This lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period.

Normally the lease is for a short period and even otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets.

Sale and Lease BackIt is lease arrangement wherein the lessee who already owns the assets, sells the same to the lessor, and thereafter takes the same asset from him on lease basis.Under this arrangement, the lessee immediately recovers the value of his already owned assets from the lessor. Thereafter, the lessee makes payment of the lease rentals periodically as usual.

Such a lease arrangement enhances the liquid resources of the lessee immediately, which can be utilised otherwise to meet his working capital requirements or to purchase another asset on cash payment basis. This type of lease is an alternative to a mortgage of the assets

Leveraged LeaseUnder leveraged leasing arrangement, a third party is involved beside lessor and lessee.

The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e., lender and the asset so purchased is held as security against the loan.The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation allowance associated with the asset.

DIRECT LEASINGUnder direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself.The major types of direct lessor include manufacturers, finance companies, independent lease companies, special purpose leasing companies etc

LEGAL ASPECTS OF LEASING 1) The lessor has the duty to deliver the asset to the lessee, to legally authorise the lessee to use the asset and to leave the asset in peaceful possession of the lessee during the lease period.2) The lessee has the obligation to pay the lease rentals as specified in the lease agreement, to protect the lessors title, to take reasonable care of the asset, and to return the leased asset on the expiry of the lease period.

ACCOUNTING TREATMENT OF LEASEPresently the accounting treatment of lease transactions in India is as follows:The leased asset is shown on the balance sheet of the lessor.Depreciation and other tax shields associated with the leased asset are claimed by the lessor.The entire lease rental is treated as income in the books of the lessor and as expense in the books of the lessee.

INCOME TAX PROVISION RELATING TO LEASINGThe principal tax provisions relating to leasing as follows:The lessee can claim lease rentals as tax-deductible expenses.The lease rentals received by the lessor are taxable under the head of Profits and Gains of Business or Profession.The lessor can claim investment allowance (this may be doubtful) and deprecation the investment made in leased assets.

SALES TAX PROVISIONS PERTAINING TO LEASINGThe major sale tax provisions relevant for leasing are as follows:The lessor is not entitled for the concessional rate of central sales tax because the asset purchased for leasing is meant neither for resale nor for the use of manufacture.The 46th amendment Act has brought lease transitions under the purview of sale and has empowered the central and state government to levy sales tax on lease transactions. While the central Sales tax has yet to be amended in this respect, several state governments have amended their sales tax laws to impose sales tax on lease transactions.

According to a recent supreme court ruling, the place of signing the lease agreement would decide the taxing jurisdictions of the lease and not in the state where the goods are put to use.

Advantages of Leasing to Lesseea) Easy source of financeb) Saving of Capital c) No Risk of Technological Obsolescenced) Improvement in Liquiditye) Efficient Maintenance Servicesf) Low Administrative and Transactions Costsg) Benefit of Tax Shield

Limitations of Leasing for LesseeHigher CostLoss of ownership incentivesPenalties on termination of leaseLoss of Salvage value of the asset.No change in asset

Advantages of Leasing to LessorHigher profitsTax benefitsQuick returnsIncreased sales

Limitations of leasing to lessorHigh risk of obsolescenceCompetitive marketPrice level changesManagement of cash flowsLong term investment

CONCEPT AND MEANING OF HIRE PURCHASEHire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase

DIFFERENCE BETWEEN LEASE FINANCING AND HIRE PURCHASE