Advantages of Leasing 1. Permit alternative use of funds: The firm is required 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 form of credit: Leasing permits firms to acquire new equipments 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: 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 be low. 4. Facilitates additional borrowings: Acquisition of assets under the lease agreement does not alter debt-equity ratio of firm. Hence, the lessee can go for additional borrowings in case need arise.. Promotion against obsolescence: A firm can avoid the risk of obsolescence by entering into operating lease agreement. This is highly useful in respect of assets which become outdated at a faster rate. . 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. . Hundred percent financing: Lease financing enable a firm to acquire the use of an asset without having to make a down payment. So, cent percent financing is assured to the lessee. . Boon to small firm: Firms which are either small or have l S) >8. Boon to small firm: Firms which are either small or have |] uncertain records of earning are able to obtain the use of : asset or equipment through lease. It is a boon to small firms and technocrats because it helps them to survive in the market. {e] €|/>Be °° ee eee Disadvantages of Leasing 1. Not suitable for new projects or venture. 2. Tax benefit/subsidies cannot be availed. 3. Loss of potential gain advantages of certain assets. 4. Higher cost as compared to debt-financing. 5. No chance for discontinue the contract. 6. No laws to deal the contract.Tax Implications of Leasin 4 Leasing has both income tax and Sales tax provisions. The principal income tax provisions relating to leasing are- a. The lessee can claim lease rentals as tax-deductable expenses. b. The lease rentals received by the lessor are taxable under > the head of ‘Profits and Gains of Business or Profession’. c. The lessor can claim investment allowance (may be doubtful) and depreciation on the investment made in leased assets. (G =] le] [>And the sales tax provisions relevant for leasing are- a. The lessor is not entitled for the concessional rate of CGST because the asset purchased for leasing is neither meant 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 concessional rate of sales tax ) b. The 46" Amendment Act has brought lease transactions under the purview of ‘sale’ and has empowered the both Central and State government to levy sales tax ( now CGST and SGST ) on lease transactions.cece Evolution/History and Growth of Leasing Industry The history of leasing dates back to 200 B.C., when Sumerians leased goods. (Sumerians- the earliest known civilization in the historical region of southern Mesopotamia). 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 1832 when Cottrell and Leonard leased academic caps, gowns and hooks. In 1877, Bell Telephone Company began renting telephones in the USA. Subsequently, during 1930s, the Railway Industry used leasing service for its rolling stock needs. In the post-war period, the American Airlines leased their jet engines for most of the new aircrafts. This development ignited B immediate popularity for the lease and generated growth of, £ leasing industry.Since WW-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 Dollar 20,000. Since 1963, commercial banks have been allowed to engage themselves in direct leasing. In the early 1960s, leasing business entered the UK following its successful and rapid development in the USA.In India, the concept of financial leasing was pioneered during 1973. The first company was set up by the Chidambaram Group in 1973 in Madras. The company undertook leasing of industrial equipments as its main activity. The Twentieth Century Leasing Company Ltd (TCLCL) was established in 1979. By 1981, other finance companies join the fray/business. The performance of first leasing company and the TCLCL motivated others to enter the leasing industry. In 1980s, financial institutions made entry into leasing business. ICICI Ltd was the first of all India financial institution to offer leasing service in 1983.Entry of commercial banks into leasing was facilitated by an amendment of BR Act. 1949. After amendment of the Act., SBI was the first commercial bank to set up a leasing subsidiary called SBI capital market, in October 1986. Later on, Canbank Financial Service Ltd, BOB Financial Service Ltd, and PNB Financial Service Ltd followed the suit. Again, IFCs Merchant Banking division started financing leasing companies as well as equipment leasing and financial services. Thus, there was virtual explosion in the number of leasing companies rising to about 400 companies during 1990.Difference between Leasing and Hire Purchase 1. Ownership: In case of lease contract, the ownership of assets/equipment rest with the leasing company (lessor), but in hire purchase, ownership of articles passes to buyer (hirer) when last installment is paid. 2. Method of Financing: Leasing is a method of financing business assets whereas hire purchase is a method of financing both business assets and consumer articles. Depreciation: In leasing, depreciation and investment allowance cannot be claimed by the lessee. In hire purchase, depreciation and investment allowance can be claimed by the hirer. = |G <|[>ee 4. Tax Benefits: In case of leasing, the entire lease rental is tax deductible expense. But only the interest component of the hire purchase installment is tax deductible. 5. Salvage Value: In case of leasing, the lessee, not being the owner of the asset, does not enjoy the salvage value of the asset. But in hire purchase, the hirer, being the owner of the “|asset, enjoys the salvage value of the asset. . Deposit: In leasing, the lessee is not required to make any deposit against the asset, whereas some percent deposit is required in hire purchase. . Rent-Purchase: With leasing, firms rent assets and with hire purchase, it helps to purchase goods/articles. . Extent of Finance: Lease financing is a kind of 100% financing since it requires no amount of deposit or margin money or down payment. But in hire purchase, margin money of some percentage of total value is to be paid by the hirer. | [-G 9. Maintenance: In leasing, the responsibility of maintenance depends as per the agreement of lease. But in hire purchase, the responsibility of maintenance is borne by the buyer/purchaser/hirer himself. 10. Financial Reporting: The lease assets are shown in the balance sheet by way of footnote only but the asset on hire purchase is shown in the balance sheet of the hirer as other assets. XXXX