Unit 2: Lease financing & hire purchase

A lease is a contract in which the owner (lessor) gives the right to use an asset to another (lessee) for a period in return for periodic payments (lease rentals), while ownership remains with the lessor.

• Cost comparison: present value of lease rentals vs cost of buying with borrowed funds (lease vs buy).
• Tax benefits: lease rentals fully deductible for the lessee; depreciation for the lessor.
• Conserving capital and preserving borrowing capacity.
• Flexibility and protection against obsolescence (operating lease).
• Convenience — quick, less documentation.
• Residual value of the asset and maintenance arrangements.

• Started with First Leasing Company of India (1973); boom in the 1980s–90s (equipment leasing by NBFCs and banks); setback after NBFC failures (1997) and changes in tax treatment.
• Now dominated by vehicle and equipment leasing, aircraft leasing (IFSC GIFT City), operating leases of IT assets, and car subscription models.
• Challenges: tax disputes (GST on lease rentals), lack of a separate leasing law, limited secondary market for used assets, competition from cheap bank loans.

Hire purchase (HP) is an agreement under which goods are let on hire with an option to purchase; ownership passes to the hirer on payment of the last instalment.

• Characteristics: down payment, periodic instalments (part principal, part interest), hirer is a bailee until the final payment, hirer may return goods and stop payments, the hire vendor can repossess on default.

• Legal framework: Hire Purchase Act, 1972 (passed but never brought into force) — so HP is governed by the Indian Contract Act (bailment), Sale of Goods Act, Motor Vehicles Act (registration in the name of hirer with endorsement of financier); leasing by the Contract Act (bailment); stamp duty under state laws.
• Income tax: HP — hirer claims depreciation and the interest component; lessor in a finance lease (tax view) claims depreciation; lessee deducts lease rentals.
• GST: lease rentals are a supply of service at the rate applicable to the goods; HP is a supply of goods.
• Accounting: Ind AS 116 (lessees recognise right-of-use assets and lease liabilities), AS 19 for non-Ind AS entities.
• RBI guidelines: leasing and HP companies are NBFCs — must register with RBI (minimum net owned funds ₹10 crore for new NBFCs by 2027), follow prudential norms (income recognition, asset classification — NPA after 90 days, provisioning, capital adequacy 15%), fair practices code (transparent terms, no coercive recovery), scale-based regulation (2021) — base, middle, upper, top layers.