Leasing

Section: D
Meaning
Lease is a form of contract transferring the
use or occupancy of land, space, structure or
equipment, in consideration of payment,
usually in the form of a rent.
Lease is a contract whereby the owner of an
asset grants to another party the exclusive
right to use the asset usually for an agreed
period of time in return for the payment of
rent.
Types
Wet Lease
and Dry
Cross border Lease
Lease
Vendor
Leasing
Sale and
Lease back

Types
Leverage
Lease

Operatin
g Lease Financial
Lease
Financial Lease
Financial leasing is a contract involving payment over
a longer period.
It is a long-term lease.
The lessee will be paying much more than the cost of
the property or equipment to the lessor in the form of
lease charges.
It is irrevocable.
In this type of leasing the lessee has to bear all costs
and the lessor does not render any service.
Operating lease
In an operating lease, the lessee uses the asset for a
specific period. The lessor bears the risk of
obsolescence and incidental risks. There is an option to
either party to terminate the lease after giving notice.
In this type of leasing
Lessor bears all expenses
Lessor will not be able to realize the full cost of the
asset
Specialized services are provided by the lessor.
This kind of lease is preferred where the equipment is
likely to suffer obsolescence.
Leveraged leases
In leveraged leases, the value of the asset
leased may be of a huge amount which may
not be possible for the lessor to finance. So,
the lessor involves one more financier who
will have charge over the leased asset.
Sale and Lease back
In a sale and leaseback, a company owning the
asset sells it to the lessor. The lessor pays
immediately for the asset but leases the asset to
the seller. Thus, the seller of the asset becomes
the lessee. The asset remains with the seller who
is a lessee but the ownership is with the lessor
who is the buyer. This arrangement is done so
that the selling company obtains finance for
running the business along with the asset.
Cross border Lease
Lease across national frontiers are called
cross border lease, Shipping, air
service, etc., will come under this
category.
Wet Lease and Dry Lease
A wet lease means that the organization or person who
owns the aircraft will provide that aircraft as well as
one or more crew members to the lessee. Even more
important, the owner also promises to conduct
adequate maintenance and procure the insurance
necessary to operate.
In case of a dry lease the owner still provides the lessee
with an aircraft – however, without a crew.
Vendor Leasing
Vendor leasing  is the process of lending money to one or more of a
company's customers in order to help them buy the company's
products. 
Vendor leasing allows vendors to offer customers another option
besides just cash-on-delivery or 30-day terms. Since it may not be
possible for some customers to meet such immediate payment
terms, it is a good option for customers. By extending the
financing option through the outside financing company, the
vendor offers a choice that allows customers to better maintain
their own cash flow.
Under this, a working relationship is established between
a leasing company and an equipment vendor to provide financing
programs to the vendor's customers to help stimulate sales.
Advantages
Permit Alternative Use of Funds
Faster and Cheaper Credit
Flexibility
Facilitate Additional Borrowing
Protection against Obsolescence
No Restrictive Covenants
Boon to small Firms
Hundred percent financing
Disadvantages
Non-availability of tax benefits
No capital gain
Cost of financing is generally higher than cost of debt
financing
Problem in termination of contract in case of
discontinued operations
No rights vested to lessee against supplier
Lease and Hire Purchase
Purpose
Transfer of Ownership
Capital gain
Right against third party
Flexibility in rental / instalments
Requirement of Liquidity
Accounting Treatment
Maintenance
Accounting and Reporting
Entries in the books of lessee
Entries in the books of Owner
Legal Aspect
Leasing is a kind of bailment, therefore implications of
bailment contract applies to leasing.
Leasing and Commercial Banking Sector

Private sector Financial Institutions: Since 1980, Private

finance companies provide leasing as major activities as ell
as a tax planning device. E.g. Sundaram Finance limited,
General Finance Limited
Public sector Financial Institutions: Financial institutions
like IFCI, ICICI, IRBI, NSIC set up their leasing divisions
or subsidiaries to do leasing business.
Banking Sector: Section 19 (1) of Banking Regulation Act
1949 set up subsidiaries for undertaking leasing activities.
The SBI was the first bank to start a subsidiary for leasing
business in 1986. Leasing in bank is done through Strategic
Business Unit (SBU) of the bank. Each SBU is managed by
trained staff and equipped with latest equipments.
Risk in Leasing
Increment in risk
Inherent risk of ownership
Default claim
Collateral
Interest and tax assumptions
Reduction in risk
Asset recovery
Productive investment
Value of investment incentive
Lease Proposal Analysis
Basic Issues
Should the asset be purchased using optimal financing
mix where Cost depends upon the capital mix
Should the asset be leased
Solution: Analysis of Project’s Net Present Value
Determination of Inflow
Choice of Rate of Discount
After tax borrowing rate
Before tax borrowing rate
Taxation Aspect
Income tax provisions
Rentals are tax deductible expenses
Rentals received by owner are taxable under the head of
profit and gains from business and profession
Owner can claim depreciation
Sales tax provisions
Owner is not entitled for the concessional rate of central
sales tax (available in case of resale or for use in
manufacturing)
The 46th amendment act has bought transitions under the
purview of sale. Some state governments have amended their
sales tax laws to impose sales tax on lease transactions,
while central sales tax act has yet to be amended.
Note all taxation provisions are subject to timely revision.