Problems of Leasing

The leasing companies in India are facing certain problems:

1) Resource constraints: Lack of licensing requirements from the Reserve Bank of India and the Government was responsible for the entry of a large number of companies into leasing business. As a result of cut throat competition, a considerable fall in the rental was experienced by the leasing companies. Further, the leasing companies are now leasing at rates that do not cover their costs. Since the leasing investment involves huge capital outlay, the companies are finding it very difficult to finance them out to their own funds.
2) Risk of obsolescence: The leasing company will get into much trouble since it has to bear the capital loss in case of obsolescence.
3) Non-availability of sales tax consideration: The implications of sales tax on lease rentals make leasing correspondingly more expensive as the cost of the equipment required under leasing becomes inflated to the extent of sales tax paid by the leasing companies. A combination of higher rate of sales tax on the acquisition of capital equipment and tax on lease rental payments makes the leasing transactions totally uneconomical.
4) Cut throat competition: Most of the companies doing leasing business come out with maiden dividends. But the companies are paying more interest on loans taken from the financial institutions or commercial banks. In such a situation, the lease rentals have to be increased. But it is not easy to raise the rental payment because the customer6s are used to lower rates. Thus, lack of finance has become one of the important obstacles to leasing companies on the way of progress.
5) Lack of qualified personnel: The nature of the leasing and hire / purchase business is nothing but financing the capital equipment to the capability of borrowed party, legal matters, recovery of rentals following a special system. But in India it is very difficult to get right man to deal with the problems of this business. On account of this fact, operations of the leasing business are bound to suffer.
6) Delay in rental payments: The late payment of rent has some cost as per the lessor’s point of view. But the lessor, while fixing the lease rentals does not take into consideration the delay in recovery of the rentals at the time of lease agreement. Again, there is another type of cost involved in the leasing activity in terms of bad debts. These two types of risks can disturb the future prospects of leasing business.
7) Attitude of government: The government has not so far come out with well defined guidelines with regard to sales tax and investment allowances of leasing business.

Hire Purchase and Installment Sale:

Hire / purchase transaction is different from installment system. Installment sale is a credit sale and the legal ownership of the asset passes immediately to the buyer as soon as the agreement is made between the buyer and the seller. Except for the timing of the transfer of ownership, installment sale and hire/purchase are similar in nature.

Tax Aspects of Hire / Purchase:

The tax aspect of hire/purchase transactions can be divided into three parts – income tax, sales tax, and interest tax aspects.

Income Tax aspects:

The treatment of a hire/purchase transaction from the point of view of income tax is governed by the provisions of a CBDT circular issued way back in 1943. According to this circular, the hirer is entitled to a) the tax shields on depreciation calculated with reference to the cash purchase price, and b) the tax shield on the consideration for hire. The circular defines consideration for hire in the same way is the total charge for credit and requires this amount to be spread evenly over the term of the agreement. From the owner’s angle the consideration for hire received by hire is liable to tax.

Sales Tax Aspects:

The salient sales tax aspects are as follows:

1) Hire / purchase transactions per se are liable to sales tax. The 46th amendment act clearly states that the tax on the sale or purchase of goods includes a tax on the delivery of goods on hire purchase or any other system of payment by installments.
2) For the purpose of levying sales tax a sale is deemed to take place only when the hirer exercises the option to purchase.
3) The amount of sales tax must be determined with reference to the depreciated value of the goods at the time when the hirer exercises the purchase option.
4) The state in which the goods have been delivered is entitled to levy and collect sales tax.
5) Sales tax cannot be levied on hire / purchase transaction structured by finance companies provided these companies are not dealers in the class of goods let on hire.
6) There is no one uniform rate of sales tax applicable to hire / purchase transactions. The rate varies from state to state.

Interest Tax aspects:

The provisions under this act are as follows:

1) Interest tax is payable on the total amount of interest accruing to a hire/ purchase company in the previous year at the rate of 3%.
2) The amount of interest which is established to have become a bad debt during the previous year can be deducted from the chargeable interest. The interest tax payable by the hire/purchase company is treated as tax deductible expenses for the purpose of computing the taxable income under the income Tax Act.