Leasing

A lease represents a contractual arrangement where by the lessor grants the lessee the right to use an asset in return for periodic lease rental payments.

Lease arrangements can be broadly divided into two categories:-

1. Operating 

2. Financial leases

An operating lease is a short term lease which is not fully amortized. A financial lease, on the other hand, is a long term leaves which is fully amortized.

As there is no separate statue for equipment leasing in India, the provisions relating to bailment in the Indian contract Act govern equipment leasing agreements as well. The lease agreement specifies the legal rights and obligations of the lessor and lessee.

The lazy can claim lease rentals as tax deductible expenses and the lessor can claim investment allowance and depreciation on the investment in leased assets.

Please transactions are disadvantages from the sales point of view for two reasons:

1. The lessor is not entitled to be concessional rate of Central sales tax and,

2. Several state governments levy sales tax on lease rentals.

In finance literature, a leasing definition is commonly regarded as a financing decision. The definition to invest in the effort is taken for granted the option of living is compared with the option of buying with borrowed fund.

To compare leaving with buying (through borrowing) the following procedure may be followed:

1. Find the present value of the post tax cash flows associated with the leasing option.

2. Calculate the present value of the post tax cash is associated with the buying (with borrowed funds) option.

3. Choose the option which has the lower present value.

In addition to financial considerations, there are several other considerations which may be relevant in a buying versus leasing decision situation: borrowing capacity of the firm, tax factor, restrictive covenants, obsolescence risk, expeditious implementation, matching of lease rentals to cash flow capability and control.

Finance Companies usually offer the facility of hire purchase as an alternative to leasing. Under a higher purchase agreement, the hirer (the counterpart of lesse) enjoys the ownership related benefits. The hirer pays regular hire-purchase instalments which cover interest as well as principal repayment.