LEASING AND HIRE PURCHASE CONTENTS Meaning and definition

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LEASING AND HIRE PURCHASE

LEASING AND HIRE PURCHASE

CONTENTS Meaning and definition of leasing Features of leasing Essential elements of leasing Features

CONTENTS Meaning and definition of leasing Features of leasing Essential elements of leasing Features of a lease contract Types of leasing Evolution of Indian Leasing Industry Pros and cons of leasing Meaning and feature of hire purchase Legal position of hire purchase Tax implication of hire purchase Leasing V/S. Hire Purchase

LEASING MEANINGq. Leasing is an arrangement that provides a firm with the use and

LEASING MEANINGq. Leasing is an arrangement that provides a firm with the use and control over assets without buying and owning the same. q It is a form of renting assets.

q Lease is a contract between the owner of the asset (lessor) and the

q Lease is a contract between the owner of the asset (lessor) and the user of the asset called the lesee, whereby the lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called the lease rental. DEFINITION“ Leasing separates ownership and use as two economic activities, and facilitates asset use without ownership. ” – by Miller, M. H. and C. W. Uptron.

FEATURES OF LEASING Lease financing is a device of financing/ money lending. It is

FEATURES OF LEASING Lease financing is a device of financing/ money lending. It is a tool of financing the cost of an asset. Leasing is a process by which a firm can obtain the use of certain fixed asset for which it must make a number of contractual, periodic, tax-deductible payments. Leasing is an alternative to purchase of an asset in order to acquire the services of that asset.

Essential Elements of Leasing 1. No. Of Parties to the Contract- There always two

Essential Elements of Leasing 1. No. Of Parties to the Contract- There always two parties to the contract: a. The owner or the lessor b. The user or the lessee 2. Assets- The subject matter of a lease financing contract may be an asset, property, or equipment 3. Consideration- The right to use an asset is given

4. Lease Period- A contract of leasing is usually undertaken for a fixed period.

4. Lease Period- A contract of leasing is usually undertaken for a fixed period. It may sometime spread over the entire economic/ useful life of the asset. 5. Use V/S. Ownership- ownership of the asset remains with the lessor where as the possession of asset lies with the lessee. 6. Termination of the Contract- After termination : a. The contract may be renewed for definite period. b. The lessee may buy the asset. c. The asset reverts to the lessor who can further lease to third party.

 Features of A Lease Contract/Agreement The lessor agrees to purchase an assets for

Features of A Lease Contract/Agreement The lessor agrees to purchase an assets for leasing to the lessee who in turn agrees to take the asset on lease. The lessee is given possession of the leased asset subject to the condition of the payment of lease rent and compliance with other term and condition. The lessee agrees to insure and maintain the asset during the tenure of the lease.

 The title to the asset remains with the lessor. The lessee agrees as

The title to the asset remains with the lessor. The lessee agrees as not to make any changes, or effect improvements or dispose equipment or do anything which may jeopardise the lessor’s interest in the equipment. As user , the lessee indemnifies the lessor against any claims made by the third parties arising out of the lessor’s ownership of the asset. The lease contract provides for the lessor’s right of action in the event of a default by the lessee during the lease period.

 At the end of the lease period, the agreement provides eithera. For the

At the end of the lease period, the agreement provides eithera. For the renewal of the contract b. Return of the asset to the lessor c. Sale of the asset to lessee by lessor

Operating Lease An operating lease is a lease whose term is short compared to

Operating Lease An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc. ) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.

Features 1. Period Operating lease is a short term arrangement for the use of

Features 1. Period Operating lease is a short term arrangement for the use of asset between the lessee and the owner of the asset. 2. Cancel The lessee cancel the operating lease prior to the end date of the operating lease. 3. It does not necessarily amortize the original cost of the asset. 4. Renew The lessee usually has the option of renewing the lease after the expiry of lease period 5. Costs Various costs related to that asset like maintenance, taxes etc…. are paid by the owner of the asset. 6. Risk It implies higher risk to the lessor but higher lease rentals to the lessee.

Financial lease A finance lease or capital lease is a type of lease in

Financial lease A finance lease or capital lease is a type of lease in which a finance company is typically the legal owner of the asset during the duration of the lease, while the lessee not just has operating control over the asset, but also has a substantial share of the economic risks and returns from the change in the valuation of the underlying asset. It ensures the lessor for amortization of the entire cost of investment plus he expected return on capital outlay during the term of lease

Features 1. The present value of the lease rentals is equal to substantially the

Features 1. The present value of the lease rentals is equal to substantially the whole of the fair value of the leased asset. 2. For longer period of time. 3. Non cancellable. 4. Lessee is responsible for all costs. 5. Renewing the lease.

Forms of Financial Lease Sale and Leaseback Primary & Secondary Lease Leveraged Lease Direct

Forms of Financial Lease Sale and Leaseback Primary & Secondary Lease Leveraged Lease Direct Leasing Straight & Modified Lease

Direct Leasing

Direct Leasing

Leveraged Lease Manufacturer Lessor Lender Lessee

Leveraged Lease Manufacturer Lessor Lender Lessee

Straight Lease Does not provide any modifications to the terms and conditions. Modified Lease

Straight Lease Does not provide any modifications to the terms and conditions. Modified Lease It provides several options to the lessee during the lease period.

Primary Lease • Rentals charged in this are more. • Lesser recover the cost

Primary Lease • Rentals charged in this are more. • Lesser recover the cost and earns profit. Secondary Lease • Nominal rentals.

Other types of Leases 1. Floating Rental Rate Lease Contracts Lease rentals are reduced

Other types of Leases 1. Floating Rental Rate Lease Contracts Lease rentals are reduced or increased according to the borrowing rates by the lessor. 2. Domestic Lease and International Lease Domestic – parties involved in the lease contract are resident in the same country. International – parties to the lease contract residing in different countries. Import Lease - The company providing equipment for lease may be located in a foreign country but the lessor and the lessee may belong to the same country. Cross Border Lease - Lease across national frontiers are called cross border lease, Shipping, air service, etc.

Sale-Aid Leasing In case, the lessor enters into any tie up arrangement with manufacturer

Sale-Aid Leasing In case, the lessor enters into any tie up arrangement with manufacturer for the marketing, it is called sales aid lease. Foreign to Foreign Lease 1. The manufacturer (China) 2. Lessor (India) 3. Lessee (Australia)

Evolution Of Indian Leasing Industry 1973 - Introduced by First Leasing Company of India

Evolution Of Indian Leasing Industry 1973 - Introduced by First Leasing Company of India Limited by Farouk Irani 1981 - the trickle started and Shetty Investment and Finance, Jaybharat Credit and Investment , Motor and General Finance , and Sundaram Finance etc. joined the leasing finance. 1982 - The industry entered the third stage in the growth phase when numerous financial institutions and commercial banks either started leasing. 1983 – ICICI , prominent among financial institutions, entered the industry. 1986 - the surge in number – from merely 2 in 1980 to 339 in 6 years

Another significant phase in the development of Indian leasing was the Dahotre Committee's recommendations

Another significant phase in the development of Indian leasing was the Dahotre Committee's recommendations based on which the RBI formed guidelines on commercial bank funding to leasing companies. 1994 – Banks were also allowed to undertake leasing activities.

ECONOMICS/ PROS AND CONS OF LEASING

ECONOMICS/ PROS AND CONS OF LEASING

Advantages & Disadvantages of Leasing to the Lessee ADVANTAGES Avoidance of Initial Cash Outlay

Advantages & Disadvantages of Leasing to the Lessee ADVANTAGES Avoidance of Initial Cash Outlay Minimum Delay Shifting the Risk of Obsolescence Enhanced Liquidity Conserving Borrowing Capacity Tax Planning and Advantage

 Higher Return on Capital Employed Convenience and Flexibility Certainty No Floatation Cost No

Higher Return on Capital Employed Convenience and Flexibility Certainty No Floatation Cost No Disposal Problem Lesser Administrative Cost

DISADVANTAGES Higher Cost Loss of Moratorium Period Risk of being Deprived of the Use

DISADVANTAGES Higher Cost Loss of Moratorium Period Risk of being Deprived of the Use of Asset No Alteration or Change in Asset Loss of Ownership incentives Penalties on Termination of Lease Loss of Salvage Value of the Asset

Advantages & Disadvantages of Leasing for the Lessor ADVANTAGES Higher Profits Tax Benefits Quick

Advantages & Disadvantages of Leasing for the Lessor ADVANTAGES Higher Profits Tax Benefits Quick Returns Increased Sales

DISADVANTAGES High Risk of Obsolescence Competitive Market Price-Level Changes Management of Cashflows Increased Cost

DISADVANTAGES High Risk of Obsolescence Competitive Market Price-Level Changes Management of Cashflows Increased Cost due to Loss of User Benefits Long-Term Investment

HIRE PURCHASE

HIRE PURCHASE

MEANING Hire Purchase means a transaction where the goods are purchased and sold on

MEANING Hire Purchase means a transaction where the goods are purchased and sold on the terms that : Payment will be made in installments Possession of goods is given to the buyer immediately

 Ownership remains with the vendor till the last installment is paid The seller

Ownership remains with the vendor till the last installment is paid The seller can repossess the goods in case of default in payment of any installment , and Each installment is treated as hire charges till the last installment is paid

FEATURES : Ø The payment is to be paid by the hirer (buyer) to

FEATURES : Ø The payment is to be paid by the hirer (buyer) to the hiree in installments over a specified period of time. Ø The possession is transferred immediately. Ø The ownership passes to the buyer only when he pays all the installments.

Ø The hiree or vendor can repossess the goods in case of default. Ø

Ø The hiree or vendor can repossess the goods in case of default. Ø The installments include interest as well as repayment of principal. Ø Usually the hiree charges interest at flat rate.

LEGAL POSITION OF HIRE PURCHASE SECTION 3 of the HIRE PURCHASE ACT , 1972

LEGAL POSITION OF HIRE PURCHASE SECTION 3 of the HIRE PURCHASE ACT , 1972 provides that every hire purchase agreement must be in writing, and signed by all the parties.

RIGHTS OF HIRER 1. The hiree (vendor) cannot terminate the agreement for default in

RIGHTS OF HIRER 1. The hiree (vendor) cannot terminate the agreement for default in payment or due to an unauthorised act or breach of expressed conditions unless a notice in writing is given to the hirer. 2. The right to repossess the goods will not exist unless sanctioned by the Court in the following cases :

 Where the hire purchase price is less than Rs. 15000 , one half

Where the hire purchase price is less than Rs. 15000 , one half of the hire purchase price has been paid Where the hire purchase is not less than Rs. 15000 , three fourth of hire purchase price has been paid HOWEVER IN CASE OF MOTOR VEHICLES THIS PROPORTION IS AS UNDER : a) One half , where hire purchase price is less than Rs. 5000

b) Three-fourth , where the hire purchase price is not less than Rs. 5000

b) Three-fourth , where the hire purchase price is not less than Rs. 5000 c) Three- fourth or such higher proportion not exceeding nine-tenth where hire purchase price is not less than Rs. 15000 3. The hirer has a right of receiving a statement from the owner giving all details

4. If the amount paid by hirer till the date of repossession of the

4. If the amount paid by hirer till the date of repossession of the goods or the value of the goods on the date of repossession of goods exceeds the total hire purchase price , the excess payment made by the hirer will be returned to the hirer by the owner of the goods

TAX IMPLICATIONS OF HIRE PURCHASE The purchaser is entitled to claim depreciation on entire

TAX IMPLICATIONS OF HIRE PURCHASE The purchaser is entitled to claim depreciation on entire hire purchase under INCOME TAX ACT , although he is not the owner till last installment. The interest component of the total installment is tax deductible for the purchaser. The consideration for hire received by the vendor is liable to tax under the head Profits and Gains of business and profession.

LEASING VS. HIRE PURCHASE BASIS LEASING HIRE PURCHASE 1. OWNERSHIP Ownership is not transferred

LEASING VS. HIRE PURCHASE BASIS LEASING HIRE PURCHASE 1. OWNERSHIP Ownership is not transferred to the lessee Ownership is transferred to the hirer on payment of last installment 2. TAX DEDUCTIBILITY Entire lease rentals are tax Only the interest component and not the entire installment is deductible 3. DEPRECIATION AND Cannot be claimed by the OTHER ALLOWANCES lessee Can be claimed by the hirer deductible expenses. 4. SALVAGE VALUE Lessee cannot realise salvage value on the expiry of the lease of life of the asset Hirer can realise salvage value after payment of last installment and expiry of the life of the asset

BASIS LEASING 5. Repairs & Maintenance Depends upon the type of lease 6. Down

BASIS LEASING 5. Repairs & Maintenance Depends upon the type of lease 6. Down Payment Not Required 7. Consideration 8. Duration Lease Rentals Comparatively Long term HIRE PURCHASE Responsibility of hire purchaser. Required Initial payment plus installment. Short Term