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Introduction
Alternatives for financing
Equipment
• Borrowing
• Borrow from a financial intermediary, Buy Equipment from a
vendor
• Leasing
• Transfer of right of use by the owner (Lessor) to the User
(Lessee) for an agreed period of time for rental
• Hire Purchase
• Equipment given on hire with an option to buy
• Installment Purchase
• Immediate transfer of ownership, payment in installments
Leasing
• The owner (Lessor) of an equipment transfers the right
to use the equipment to the user (Lessee) for an agreed
period of time in return of rental
– Lessor
– Lessee
– Lease Term
• Primary – Non-cancellable
• Secondary - Renewal period
– Lease Rental
– No Transfer of ownership
Types of Leases
• Finance Lease • Operating Lease
– Transfer of ownership at • Lease other than finance
the end of term lease is Operating Lease
– Lessee has an option to – Wet Lease – lessor
purchase the asset at a provides maintenance,
price<fair market value insurance, operating know-
– Lease term covers major how
part of useful life – Dry Lease – lessee bears
– PV of minimum lease the insurance and
payments is substantially maintenance
=>Fair Market Value at the
inception • Right to terminate at a
• `Hell or high water’ short notice without
significant penalty
• Full payout lease
• Maintenance & Insurance
Types of Leases
• Sale and Lease Back • Direct Lease
– To unlock the investment
– Operating or Finance
• Bipartite
– Supplier cum Lessor • Tripartite
– Lessee – Supplier
– Suitable for Operating – Lessor
Lease – Lessee
• Upgrade Lease
• Sale-aid Leasing
• Replacement (swap)
Lease
Types of Leases
• Single Investor vs Leveraged Lease
(Uses a D/E Mix without recourse)
Lessor
Trustee Lessee
Loan Participant
(With recourse to the lessee)
• Big Ticket Leasing
• Domestic Vs International Lease
• Double Dip Transaction
Advantages of Leasing
• Flexibility
• Equated
• Stepped – % Increase every year
• Ballooned – Small rental followed by large payment
• Deferred – Deferement period
• Tax benefits
• Less Paper Work
• Convenience
• Margin Money
Rental Structure
• Cost of Equipment = Rs.50 lakhs
• Required rate of return = 16%
• Lease Period = 5 years
• Residual Value = Nil
• Equated
LR x PVIFA(16%,5) = Rs.50 lakhs
LR = Rs.50 lakhs/PVIFA(16%,5)
= Rs.50 lakhs/3.274 = Rs.15.272 L
Rental Structure
• Stepped - 10% increase every year
Year LR PVIF(16%,y) LR x PVIF (16%,y)
1 L .862 .862 L
2 Lx 1.1 .743 .8173 L
3 L x (1.1)^2 .641 .7756 L
4 L x (1.1)^3 .552 .7347L
5 L x (1.1)^4 .476 .6969 L
3.8865 L
3.8865 L = Rs.50 lakhs
L = Rs.12.865
12.865, 14.152, 15.567, 17.123, 18.836
Rental Structure
• Ballooned - 5 lakhs for first four years
0 13.165
1 15.272 12.865 5.00 Nil 13.165 18.0
The tax aspect of leasing can be divided into two parts – the income
tax aspect and the sales tax aspects.
The rental income derived by the lessor is included under the head
`profit s & gains of business’ for the purpose of assessing the
income tax liability.
From the lessee’s angle, the rental expenses can be treated as tax
deductible . The costs incurred in insuring & maintaining the leased
asset are also tax deductible.
By virtue of circular issued by Central Board of Direct Taxes in 1943,
the leased agreement must not provide for a transfer of ownership
of the leased asset or a bargained purchased option to lessee.
Inclusion of these provisions will result in the leased transaction
being treated as a hire purchase transaction.