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INDEX

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SUBJECT INTRODUCTION TO LEASING TYPES OF LEASE ADVANTAGES AND DISADVANTAGES OF LEASING INTRODUCTION TO HIRE PURCHASE ADVANTAGES AND DISADVANTAGE OF HIRE PURCHASE LEGAL ASPECTS OF HIRE PURCHASE DIFFERENCE BETWEEN LEASE AND HIRE PURCHASE CONCLUSION TO LEASING AND HIREPURCHASE

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CHAPTER1. INTRODUCTION TO LEASING


Traditionally firms acquire productive assets and use them as owners. The sources of finance to a firm for finance to a firm for procuring assets may be internal or external. Over the years there has been a declining trend in the internally generated resources of Indian companies due to low profitability. The financial institutions experience paucity of funds at their disposal to meet the increasing needs of borrowers. Further, modern business environment is becoming more and more complex. To succeed in the situation, the firms aim at growth with stability. To accomplish this objective, firms are required to go for massive expansion, diversification and modernization. Essentially such projects involve a huge amount of investment. High rate of inflation, severe cost escalation, heavy taxation and meager internal resources forced many companies to look for alternative means of financing the projects. Leasing has emerged as a new source of financing capital assets.

Concept of leasing A lease is defined asLease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right it use the asset usually for an agreed period of time in return for the payment of rent. James c. van Horne Leasing, as a financing concept, is an arrangement between two parties, the leasing company or lessor and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent. The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties. However, the lessor remains the owner of the equipment over the primary period. By resorting to
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leasing, the lessee company is able to exploit the economic value of the equipment by using it as if he owned it without having to pay for its capital cost. Lease rentals can be conveniently paid over the lease period out of profits earned from the use of the equipment and the rent is sent percent tax deductible.

History and development of leasing The history of leasing dates back to 200 BC when Sumerians leased goods. Romans had developed a full body law relating to lease for movable and immovable property. However the modern concept of leasing appeared for the first time in 1877 when the Bell Telephone Company began renting telephones in the U.S.A. In 1832, Cottrell and Leonard leased academic caps, gowns and hoods. Subsequently, during 1930s the Railway Industry used leasing service for its rolling stock needs. In the post war period, the American Air Lines leased their jet engines for most of the new air crafts. This development ignited immediate popularity for the lease and generated growth of leasing industry. Since World War II the use of leasing has been greatly expanded and is constantly used for new products and new industries. In May 1952, Henry Scholfeld set up a separate Corporation in the USA to handle lease transaction. He founded the US Leasing Corporation with a capital of $20,000. Since 1963, commercial banks have been allowed to engage themselves in direct leasing. In the early 1960s leasing entered the United Kingdom following its successful and rapid development in the USA. The concept of financial leasing was pioneered in India during 1973. The First Company was setup by the Chidambaram group in 1973 in Madras. The company undertook leasing of industrial equipment as its main activity. The Twentieth century Leasing Company Limited was established in 1979. By 1981, four finance companies joined the fray. The performance of First Leasing Company Limited
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and the Twentieth Century Leasing Company Limited motivated others to enter the leasing industry. In 1980's financial institutions made entry into leasing business. Industrial Credit and Investment Corporation was the first all India financial institution to offer leasing in 1983. Entry of commercial banks into leasing was facilitated by an amendment of Banking Regulation Act, 1949. State Bank of India was the first commercial bank to set up a leasing subsidiary, SBI capital market, in October 1986. Can Bank Financial Services Ltd., BOB Financial Service Ltd., and PNB Financial Services Limited followed suit. Industrial Finance Corporation's Merchant Banking division started financing leasing companies as well as equipment leasing and financial services. There was thus virtual explosion in the number of leasing companies rising to about 400 companies in 1990. In the subsequent years, the adverse trends in capital market and other factors led to a situation where apart from the institutional lessors, there were hardly 20 to 25 private leasing companies who were active in the field. The total volume of leasing business transacted, by both private and public sector leasing companies was Rs.5000 crores in 1993 and it is expected to cross Rs. 10,000 crores by March 1995.

The steps involved in a leasing transaction The steps involved in a leasing transaction are summarized as follows: 1. First, the lessee has to decide the asset required and select the supplier. He has to decide about the design specifications, the price, warranties, terms of delivery, servicing etc. 2. The lessee then enters into a lease agreement with the lessor. The lease agreement contains the terms and conditions of the lease such as,
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(a) The basic lease period during which the lease is irrecoverable. (b) The timing and amount of periodical rental payments during the lease period. (c) Details of any option to renew the lease or to purchase the asset at the end of the period. (d) Details regarding payment of cost of maintenance and repairs, taxes, insurance and other expenses. 3. After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. The lessor makes payment to the manufacturer after the asset has been delivered and accepted by the lessee.

Contents of a lease agreement The lease agreement specifies the legal rights and obligations of the lessor and the lessee. It typically contains terms relating to the following: 1. Description of the lessor, the lessee, and the equipment. 2. Amount, time, and place of lease rental payments. 3. Time and place of equipment delivery. 4. Lessee's responsibility for taking delivery and possession of the leased equipment. 5. Lessee's responsibility for maintenance, repairs, registration, etc. and the lessor's right in case of default by the lessee. 6. Lessee's right to enjoy the benefits of the warranties provided by the equipment manufacturer/supplier. 7. Insurance to be taken by the lessee on behalf of the lessor. 8. Variation in lease rentals if there is a change in certain external factors like bank interest rates, depreciation rates, and fiscal incentives. 9. Option of lease renewal for the lessee. 10. Return of equipment on expiry of the lease period.
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11. Arbitration procedure in the event of dispute.

Income tax provisions relating to leasing The principal income-tax provisions relating to leasing are as follows: 1. The lessee can claim lease rentals as tax-deductible expenses. 2. The lease rentals received by the lessor are taxable under the head of 'Profits and Gains of Business or Profession'. 3. The lessor can claim investment allowance (this may be doubtful) and depreciation on the investment made in leased assets.

Sales tax provisions pertaining to leasing The major sales tax provisions relevant for leasing are as follows: 1. 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 use in manufacture. (It may be noted that if a firm buys an asset for resale or for use in manufacture it is entitled for the confessional rate of sales tax). 2. 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 Act has yet to be amended in this respect, several state governments have amended their sales tax laws to impose sales tax on lease transactions.

CHAPTER2. TYPES OF LEASE


The lease agreement can be classified broadly into four categories: 1. FINANCIAL LEASE A financial lease is also known as Capital lease, Long-term lease, Net lease and Close lease. In a financial lease, the lessee selects the equipments, settles the rice and terms of sale and arranges with a leasing company to buy it. He enters into a irrevocable and non-cancellable contractual agreement with the leasing company. The lessee uses the equipment exclusively, maintains it, insures and avails of the after sales service and warranty backing it. He also bears the risk of obsolescence as it stands committed to pay the rental for the entire lease period. The financial lease could also be with purchase option, where at the end of the predetermined period, the lessee has the option to buy the equipment at a predetermined value or at a nominal value or at fair market price. The financial lease may also contain a non cancellable clause which means that the lessor transfers the title to the lessee at the end of the lease period. Under a financial lease, the rate of lease would be fixed based on the kind of lease, the period of lease, periodicity of rent payment, and the rate of depreciation and other tax benefits available. The leasing company also charges nominal service charges to cover legal and other costs. The leasing company may also insist on collaterals or bank's guarantee in individual cases. In a large number of cases, the financial leases are used as financing cum tax planning tool. The financial lease is very popular in India as in other countries like USA, UK and Japan. On an all India basis, at present, approximately a lease worth Rs. 75 to Rs. 100 crores is transacted as a tax planning device. The high costs of equipments such as office equipment, diesel generators, machine tools, textile machinery, containers, locomotives etc., are leased under financial lease.
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2. OPERATING LEASE An operating lease is also known as Service lease, Short term lease or True lease. In this lease, the contractual period between lessor and lessee is less than the full expected economic life of equipment. This means that the lease is for a limited period may be a month, six months, a year or few years. The lease is terminable by giving stipulated notice as per the agreement. Normally, the lease rentals will be higher as compared to other leases on account of short period of primary lease. The risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenditure. The lessor also does the services like handling warranty claims, paying taxes, scheduling and performing maintenance and keeping complete records lease is suitable for, (i) Computers, copy machines and other office equipments, vehicles, material handling equipments etc. Which are sensitive to obsolescence and (ii) Where the lessee is interested in tiding over temporary problem.

Distinction between a Financial Lease and Operating Lease Financial Lease Operating Lease

1. A financial lease is like an installment 1. An operating lease is a rental loan. It is a legal commitment to pay for agreement. The lessee is not committed the entire cost of the equipment plus to paying more than the original cost of interest over a specified period of time. equipment during contractual period. The lessee commits to a series of payment which in total exceed the cost of the equipment. 2. It excludes provisions for 2.0perating lease provides for

maintenance or taxes which are paid maintenance expenses and taxes of the separately by the lessee. lessor.

3. The risk of obsolescence is assumed 3. Leasing company assumes risk of by the lessee obsolescence. Contract period ranges from

4. Contract period ranges from medium 4. to long term.

intermediate to short-term.

5. Contracts are usually non cancellable. 5. Contracts are usually cancellable either by the lessor or by the lessee. 6. Air crafts, land and building heavy 6. machinery are leased. Computers, office equipments,

automobiles, truck etc. are leased. The financial commitment is

7. The lease involves a financial 7.

commitment similar to a loan by a restricted to regular rental payment. The leasing company. It places the lessee in rentals find a place in the P&L A/c of a position of borrow. 8. The lessor fulfills financial function. the lessee. 8. The lessor fulfills service function.

3. LEVERAGE LEASE A leverage lease is used for financing those assets which require huge capital outlay. The outlay for purchase cost of the asset generally varies from Rs. 50 lakhs to Rs. 2 crore arid has economic life of 10 years or more. The leverage lease agreement involves three parties, the lessee, the lessor and the lender. The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20% to 50%. The balance is provided by a person or a group of persons in the form of loan to the lessor. The loan is generally secured by mortgage of the asset besides assignment of the leased rental payments -, the position of the lessee under a leveraged leasing agreement is the same as in the case of any other type of lease. In leveraged lease, a wide range of equipments such as rail road, rolling stock, coal mining, electricity generating plants, pipe lines, ships etc. are acquired. Under a leverage lease, there are some attractive investment features in the form of after-tax consequences for the owner of the equipment. By investing 20.% or 25% of the cost of an asset, the lessor is entitled to 100% allowance for depreciation plus the investment allowance. In addition, interest expenses related to his borrowings are also tax deductible. From the point of view of lessee, lease rentals are deductible in full as an operating expense.

4. SALE AND LEASE BACK Under this type of lease, a firm which has an asset sells it to the leasing company and gets it back on lease. The asset is generally sold at its market value. The firm receives the sale price in cash and gets the right to use the asset during the lease period. The firm makes periodical rental payment to the lessor. The title to the asset vests with the lessor. Most of the lease back agreements are on a net - net basis which means that the lessee pays all maintenance expenses, property taxes
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and -insurance. In some cases, the lease agreement allows the lease to repurchase the property at the termination of lease. The sale and lease back agreement is beneficial to both lessor and lessee. The lessor gets immediate cash which becomes available for working capital or for further expansion and lessor gets tax benefits. Retail stores, office buildings, multipurpose industrial building and shopping centers are financed under this method.

5. CROSS BORDER LEASE Cross border lease is international leasing and is known as transnational leasing. It relates to a lease transaction between a lessor and lessee domiciled in different countries and includes exports leasing. In other words the lessor may be of one country and the lessee may be of another country. To illustrate, if a leasing company in USA makes an available an Air bus on lease to Air India, there would be a cross border lease. Indian leasing industry is unlikely to deal in export border leases for big ticket items such as aircraft but it is well placed to contribute to India's export earnings by offering the lease option. First Leasing Company has initiated discussions with Bulgar Leasing of Bulgaria to export bull dozers and shovels in significant number of an export lease to that country.

6. WET LEASE AND DRY LEASE A wet lease is one where the lessor is responsible for full contract and maintenance of the leased asset. For instance, the Jet airways have entered into an wet lease agreement with Oman airways for two air buses for 6 month from may 2009. On the other hand, a dry lease involves the payment of insurance and maintenance cost by lessee.
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7. VENDER LEASING A vender leasing is where the retail venders tie up with the lease finance companies which give financing option to the customers of the vendors to purchase a product. This type of lease is popular in auto finance.

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CHAPTER3. ADVANTAGES AND DISADVANTAGES OF LEASING


Advantages of leasing

1. Permit Alternative Use of Funds: A leasing arrangement provides a firm with the use and control over asset without incurring huge capital expenditure. The firm is required only to make periodical rental payments. It saves considerable funds for alternative uses which would otherwise be tied up in fixed capital.

2. Faster and Cheaper Credit: Depending on tax structure of the lessee it costs less than other methods of acquiring assets. It permits firms to acquire new equipment without going through formal scrutiny procedure. Hence acquisition of assets under leasing agreement is cheaper and faster than any other source of finance.

3. Flexibility: Leasing arrangements may be tailored to the lessee's needs more easily that ordinary financing. Lease rentals can be structured to match the lessee's cash flows. It can be skipped during the months when the cash flows are expected to below.

4. Facilitates Additional Borrowings: Leasing may increase long-term ability to acquire funds. The lessee can utilize more funds for working capital needs. Moreover, acquisition of assets under the lease agreement does not alter debt equity ratio. Hence, the lessee can go for an
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additional borrowing in case need arises.

5. Protection against obsolescence: A firm can avoid risk of obsolescence by entering into operating lease agreement. This is highly useful in respect of assets which become obsolete at a faster rate.

6. No Restrictive Covenants: The restrictive covenants such as debt equity ratio, declaration of dividend etc., which are usually imposed under debenture or loan agreement are absolutely absent in a lease agreement.

7. Hundred Percent Financing: Lease financing enables a firm to acquire the use of an asset without having to make a down payment. So hundred percent financing is assured to the lessee.

8. Boon to Small Firm: The firms which are either small or have uncertain records of earning are able to obtain the use of asset through lease financing. It is a boon to small firms and technocrats who are able to make promoter's contribution as required by financial institutions.

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Disadvantages of Leasing

1. Lease is not suitable mode of project finance. This is because rentals are repayable soon after entering into lease agreement while in new projects cash generations may start only after a long gestation period.

2. Certain tax benefits/incentives such as subsidy may not be available on leased equipment.

3. The value of real assets such as land and building may increase during lease period. In such a case the lessee loses the advantage of a potential capital gain.

4. The cost of financing is generally higher than that of debt financing.

5. A manufacturer who wants to discontinue a particular line of business will not in a position to terminate the contract except by paying heavy penalties. If it is an owned asset the manufacturer can sell the equipment at his will.

6. If the lessee is not able to pay rentals regularly, the lessor would suffer a loss particularly when the asset is a sophisticated one and less liquid.

7. In case of lease agreement, it is lessor who has purchased the asset from the supplier and not the lessee. Hence, the lessee by himself is not entitled to any protection in case the supplier commits breach of warranties in respect of the leased assets.

8. In the absence of exclusive laws dealing with the lease transaction, several
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problems crop up between lessor and lessee resulting in unnecessary complications and avoidable tension.

Other Factors Influencing Buy/Borrow or Lease Decision A firm may propose to acquire a certain asset either with equity funds or with a financial lease. The firm's management in such a case, should take into consideration certain factors while evaluating the above financial proposals. These factors are: 1. Capital Adequacy: If the firm has adequate shareholders' equity it is better to go for buying the asset rather than taking it out on a lease basis. In the absence of sufficient capital, raising new capital or retaining a greater proportion of earnings should be considered rather than assuming further debt obligations through leasing.

2. Liquidity Considerations: A firm has to maintain sufficient liquidity for meeting any sudden shortfall in cash inflows or for meeting any capital expenditures. If sufficient liquidity is not available, leasing is the solution.

3. Flexibility Considerations: Buying an asset involves onetime payment which cannot be flexible. If the asset is bought through borrowed funds, that will be rigid repayment schedule. On the other hand leasing arrangements may be tailored to the lessee's needs more easily and lease rentals can be structured to match the lessee's cash flows.

4. Nature of Asset: For those assets which become obsolete at a faster rate, 'buying' that asset is not
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preferable. The best solution is to go for operating leasing which serves as a protection against obsolescence.

5. Availability of Finance: In the absence of adequate owned funds, one has to go for borrowed funds to buy an asset. There is no guarantee for the continuous availability of borrowed funds and there is a fear of repayment on demand stipulated by some lending institutions. On the other hand fixed-rate finance may be available by leasing the equipment and there is also a guaranteed continuous availability of finance. Again, there may not be any restrictive covenants under leasing which are normally found in all loan agreements.

6. Debt Capacity: From the lessee's point of view leasing is off-balance sheet financing and hence it increases the overall debt capacity of a firm. Leasing plays a vital role in a firm's overall financing strategy to the extent to which it enables the firm to increase its overall debt raising capacity. Hence, buy or lease decision depends upon the financing strategy of a firm also.

7. Grants and Incentives Consideration: Government grants, incentives and other benefits are available for purchased equipment as well as leased equipment depending upon the government's policy. Therefore, the method of finance either to buy or lease should take into account the eligibility conditions to avail of such grants and incentives.

8. Borrowing Restrictions: Borrowings for the purpose of acquiring an asset may not be permitted due to some
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restrictive covenants and government regulations. Sometimes the memorandum may restrict the borrowing powers of the company. In such cases leasing is the only answer to acquire such assets.

9. Administrative Considerations: Buy or lease decision depends 'on administrative conveniences like simplicity of book-keeping procedures, easy cash flow forecasting etc. Generally firms prefer those methods of finance which facilitate easy administration.

Problems of leasing Leasing has great potential in India. However, leasing in India faces serious handicaps which may mar its growth in future. The following are some of the problems. (i) Unhealthy Competition The market for leasing has not grown with the same pace as the number of lessors. As a result, there is over supply of lessors leading to competition. With the leasing business becoming more competitive, the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3 percent. Bank subsidiaries and financial institutions have the competitive edge over the private sector concerns because of cheap source of finance.

(ii) Lack of Qualified Personnel Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a specialized business and persons constituting its top management should have expertise in accounting, finance, legal and decision areas. In India, the concept of leasing business is of recent one and hence it is difficult to get right man
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to deal with leasing business. On account of this, operations of leasing business are bound to suffer.

(iii) Tax Considerations Most people believe that lessees prefer leasing because of the tax benefits if offers. In reality, it only transfers, the benefit, i.e., the lessee's tax shelter is lessor's burden. The lease becomes economically viable only when the transfers effective tax rate is low. In addition, taxes like sales tax, wealth tax, additional tax, surcharge etc. add to the cost of leasing. Thus leasing becomes more expensive from of financing than conventional mode of finance such as hire purchase.

(iv) Stamp Duty The States treat a leasing transaction as a sale for the purpose of making them eligible to sales tax. On the contrary, for stamp duty, the transaction is treated as a pure lease transaction. Accordingly a heavy stamp duty is lived on lease documents. This adds to the burden of leasing industry.

(v) Delayed Payment and Bad Debts The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor does not take into consideration this aspect while fixing the rentals at the time of lease agreement. These problems would disturb prospects of leasing business.

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CHAPTER4. INTRODUCTION TO HIRE PURCHASE


Hire 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. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid.

The hire Purchase Act, 1972 defines a hire purchase agreement as, an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:a) Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and b) The property in the goods is to pass to such person on the payment of the last of such installments, and c) Such person has a right to terminate the agreement at any time before the property so passes. History of hire purchase Hire purchase has been there in India for more than 6 decades. The first hire purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. This company was based in Madras. In north India, Motor and General Finance and Installment Supply Company was set up. This was around 1925.Consumer durables hire purchase was promoted by the dealers in the equipment. Singer Sewing Machine or Murphy radio dealers would provide
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installment facilities on hire purchase basis to the customers of their products. Hire purchase of commercial vehicles also has flourished fast.

Features of a Hire Purchase 1. Hire-Purchase System is governed by Hire-Purchase Act 1972 2. It is an agreement of hiring 3. It is an agreement between Hirer and Hire Vendor 4. Terms and conditions between the parties are entered and recorded in a document called Hire-Purchase Agreement. 5. Cash price of goods is paid in installment on agreed terms. 6. The title to goods passes on last payment 7. The Hire Vendor (Seller) can take possession of goods if Hirer fails to pay installment 8. The Hirer is not responsible for risk of loss of goods, till the ownership is transferred. 9. The Hirer cannot mortgage, hire or sell or pledge the goods 10.The Hirer has got a right to terminate the agreement at any time before the property so passes.

Steps involved in hire purchase 1. The Dealer, contracts with finance co. for financing his hire purchase deals. 2. The customer selects the goods for HP, and dealer arranges for the complete set of documents. 3. Down payment by customer on completion of proposal form.
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4. Dealer sends documents to finance co. with request to purchase the goods, and accept the HP transaction. 5. The finance co. signs the agreement and sends copy along with EMI details to dealer. 6. Dealer delivers the goods to the customer, property passes on to the finance co. 7. Hirer pays EMIs, and on last payment , the ownership passes on to him, with loan completion certificate by the finance co.

Income tax aspect 1. It is governed by central board of direct taxes (CBDT) in 1943. 2. This circular specifies that the hirer is entitled to the tax shield on depreciation, which is calculated with reference to the cash purchase price & tax shield on the consideration for hire.

Sales tax aspect 1. A sale is deemed to take place only when the hirer exercises an option to purchase. 2. Sales tax amount must be fixed with depreciated value of goods. 3. Sales tax cant be levied on hire purchase transactions structured by finance companies.

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4. There is no uniform rate of sales tax applicable to hire purchase. it vary from state to state.

Interest rate aspect 1. It is payable on the total amount of interest aggregating to a hire purchase company in the previous year at the rate of 3%. 2. Payable amount of interest established during the previous year can be deducted from chargeable interest.

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CHAPTER5. ADVANTAGES AND DISADVANTAGE OF HIRE PURCHASE


Advantages of Hire Purchase

Spread the cost of finance. Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time. 1) Interest-free credit: Some merchants offer customers the opportunity to pay for goods and services on interest free credit. This is particularly common when making a new car purchase or on white goods during an economic downturn.

2) Higher acceptance rates: The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral;

3) Sales : A hire purchase agreement allows a consumer to purchase sale items when they aren't in a position to pay in cash. The discounts secured will save many families money;

4) Debt solution: Consumers that buy on credit can pursue a debt solution, such as a debt management plan, should they experience money problems further down the line.

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Disadvantages of Hire Purchase

1) Personal debt A hire purchase agreement is yet another form of personal debt it is monthly repayment commitment that needs to be paid each month.

2) Final payment A consumer doesn't have legitimate title to the goods until the final monthly repayment has been made.

3) Bad credit. All hire purchase agreements will involve a credit check. Consumers that have a bad credit rating will either be turned down or will be asked to pay a high interest rate;

4) Creditor harassment Opting to buy on credit can create money problems should a family experience a change of personal circumstances.

5) Repossession rights A seller is entitled to 'snatch back' any goods when less than a third of the amount has been paid back. Should more than a third of the amount have been paid back, the seller will need a court order or for the buyer to return the item voluntarily.

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CHAPTER6. LEGAL ASPECTS OF HIRE PURCHASE


Standard Provisions of Hire Purchase To be valid, HP agreements must be in writing and signed by both [parties].They must clearly lay out the following information in a print that all can read without effort: 1. A clear description of the goods 2. The cash price for the goods 3. The HP price, i.e., the total sum that must be paid to hire and then purchasethe goods 4. The deposit 5. The monthly installments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions). 6. A reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). 7. The right of the hire to terminate the contract when he feels like doing so with a valid reason.

The seller and the owner If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the
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transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the goods to the buyer only after all the installments have been paid. To combat this, some jurisdictions, including Ireland, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract.

Implied warranties and conditions to protect the hirer The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present: 1. The hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract 2. The owner will be able to pass title to, or ownership of, the goods when the contract requires it 3. That the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability. Where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample.

The hirer's rights The hirer usually has the following rights: 1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate)
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2. To return the goods to the owner this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value 3. with the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost. The hirer's obligations The hirer usually has the following obligations: 1. To pay the hire installments 2. To take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value) 3. To inform the owner where the goods will be kept. 4. A hirer can sell the products if, and only if, he has purchased the goods finally or else not to any other third party. It is pretty much similar to installments but the main difference is of ownership.

The owner's rights The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner:
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1. To forfeit the deposit 2. To retain the installments already paid and recover the balance due 3. To repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) 4. To claim damages for any loss suffered.

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CHAPTER7. DIFFERENCE BETWEEN LEASE AND HIRE PURCHASE


1. Ownership of the Asset In lease, ownership lies with the lessor. The lessee has the right to use the equipment and does not have an option to purchase. In hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid. 2. Depreciation In lease financing, the depreciation is claimed as an expense in the books of lessor. On the other hand, the depreciation claim is allowed to the hirer in case of hire purchase transaction. 3. Rental Payments The lease rentals cover the cost of using an asset. Normally, it is derived with the cost of an asset over the asset life. In case of hire purchase, installment is inclusive of the principal amount and the interest for the time period the asset is utilized. 4. Duration Generally lease agreements are done for longer duration and for bigger assets like land, property etc. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car, machinery etc.
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5. Tax Impact In lease agreement, the total lease rentals are shown as expenditure by the lessee. In hire purchase, the hirer claims the depreciation of asset as an expense.

6. Repairs and Maintenance Repairs and maintenance of the asset in financial lease is the responsibility of the lessee but in operating lease, it is the responsibility of the lessor. In hire purchase, the responsibility lies with the hirer.

7. Extent of Finance Lease financing can be called the complete financing option in which no down payments are required. In case of hire purchase, the normally 20 to 25 % margin money is required to be paid upfront by the hirer. Therefore, we call it a partial finance like loans etc.

8. Salvage Value The lessee, not being the owner of the asset, does not enjoy the salvage value of the asset. The hirer, in purchase, being the owner of the asset, enjoys salvage value of the asset.

9. Deposit Lessee is enquired to make any deposit. Whereas 20% deposit is required in hire purchase.

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10. Rent-Purchase With lease, we rent. With hire purchase we buy the goods.

The option of lease finance or the hire purchase can be opted by the businessmen but they should be analyzed properly as to how much the option suits to the business requirement and situations.

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CHAPTER8. CONCLUSION TO LEASING AND HIREPURCHASE


What life would be today in India if hire purchase had never been introduced. Bus travel would remain the luxury of the urban middle class, far beyond the reach of the masses and the rural areas. Motor cars would be few. Where lakhs of stone houses now stand, there would still be empty fields, paddy lands, and hutments. Just as the computer has revolutionized modern business by performing highly complex tasks in a fraction of the time and cost required by man, creating new jobs, new industries, new wealth in the process, so hire purchase has revolutionized commerce in India. In India the system known as hire purchase has played a parallel role, stimulating a dramatic growth in the road transport and housing industries. About 50% of passenger road transport and nearly all lorry transport are in the private sector. Since 1960 there has been a fivefold increase in the total number of motor vehicles. This enormous expansion was made possible by a system permitting the owner to make a 25% down-payment on a new vehicle and pay the balance in installments over several years. More recently this system has been extended to the purchase of motorcycles and auto-rickshaws accounting for a twenty-fold increase in these vehicles in the last twenty years. A similar expansion has taken place in the housing industry by permitting wouldbe home owners to borrow 75% of the construction cost and repay it by installment out of future income. House building which was once beyond the means of nearly

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the entire population due to the need for a huge lump sum investment has now become possible for many more people with steady income and job security. Leasing today accounts for six percent of the total capital investment in India. The 8th plan envisages capital formation of Rs. 8000 billion 50 per cent of which is to take place in the private sector. Leasing will play a significant role to account for at least 15 percent of gross capital formation. The world leasing industry grew at a rate of about 10 per cent. As the economy is opened up there will be substantial demand for a variety of leasing products such as foreign currency leases, cross border leases, leverage leases etc. Leasing companies set for substantial growth in line with international trends. Leasing has great prospects in India. It is on the threshold of a major breakthrough in industrial development due to liberalized economic policy measures initiated by the government. Leasing as a convenient and flexible financing option can play a vital role in the process of industrial development. The leasing industry has taken the centre stage with the government and public sector undertakings are looking to industry to finance railway, telecommunication, transport, power and infrastructure sectors. The infrastructure financing so crucial for an economic growth cannot be accelerated without leasing industry. The government has indicated that it is open to suggestions for reviewing the existing policies. Such conduciveness and the willingness to prevent bottlenecks in the area of taxation and other areas will go a long way in speeding up the growth of the industry.

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BIBLIOGRAPHY:
Websites www.wikipedia.com www.investopedia.com

Books Financial markets and services Gordon Natarajan

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