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The history of leasing in Sri Lanka dates back to 1977. But the evolution of leasing industry began in 1980 when the government of Sri Lanka floated Lanka ORIX Leasing Company (LORC) as a joint venture on recommendation of the World Bank. This earmarked the emergence of leasing industry in Sri Lanka.

Unlike the rest of the world where operating leases are conventionally more popular leasing structures, in Sri Lanka, almost all leases are finance leases with minimal operating leases offered in the country. Also, in terms of asset classes, 95% of the total business in the leasing market is driven by vehicle leasing.

Leasing in Sri Lanka is governed by the Finance Leasing Act, 2001[1] wherein both registered finance companies and banks can undertake leasing in the country. Apart from the registered finance companies, public limited companies can also undertake leasing subject to minimum capital requirement of 300 million[2] Sri Lankan Rupees. These companies are referred to as leasing companies. There were 72 registered leasing companies operating in Sri Lanka as on 2012.

Typically the difference between finance companies and leasing companies is based on acceptance of deposits and on the type of activities they can undertake. A finance company can accept deposit but a leasing company cannot accept deposit. Finance companies can engage in hire purchase and consumer finance along with leasing. Whereas leasing companies can offer hire purchase and leasing but cannot undertake consumer finance. Also, leasing companies can solicit deposits from public only if they take a banking license or register themselves as a finance company.

In essence, leasing activities can be undertaken by the following entities in Sri Lanka:

a.       Banks

                                i.            Licensed commercial banks

                              ii.            Licensed specialised banks

b.      Registered finance companies

c.       Registered leasing companies

To carry out finance leasing business, the above mentioned entities will have to register themselves with the Finance Leasing Act, No.56 of 2000. Once registered, the aforementioned entities are referred to as Registered Finance Leasing Companies (RFLE).





 Tax Provisions

         In order to promote leasing industry in Sri Lanka, exemptions has been provided under various tax laws. Leasing industry in Sri Lanka has propelled due to minimum tax impact on the leasing transactions undertaken. The provisions relating to leasing taxation has been cited below:

  1. Stamp Duty

Stamp Duty[3] is charged on lease or hire of any property at the rate of Rs 10 for every thousand rupees or part thereof provided the lease term exceeds twenty years. However, certain lease transactions are exempted from stamp duty. The exemption[4] pertaining to stamp duty are as follows:

·         Any instrument relating to any finance lease executed in respect of any property other than finance lease in respect of motor vehicles used for travelling.

·         Any instrument relating to lease or rent of any building where such lease or rent payment does not exceed Rs. 5000 per month.


  1. Value Added Tax (VAT) [5]

 Presently, VAT is applicable at the rate of 12% on supply of financial service by specified person. Supply of financial services includes among others provision of leasing facilities under any finance lease agreement or operating leasing agreement of any asset other than any land or building, if such agreement is entered into on or after October 25, 2014 and not being an agreement for re-schedule of any agreement entered into prior to October 25, 2014.

Section 25A of VAT Act, 2002 provides for levy of VAT on supply of financial services:

  1. “by any specified institution during the period commencing January 1, 2003 and ending on June 30, 2003; and Charge of Value Added Tax on the supply of financial services by specified institutions or other person
  2. by any person on or after July 1,2003 but prior to December 31,2007;
  3. by any person other than a Co-operative Society registered under the Co-    operative Societies Law. No 5 of 1972, on or after January 1, 2008; and
  4. by any person other than a Co- operative Society registered under the Co-operative Societies Law No 5 of 1972 or Lady Lochore Loan Fund established under the Act No 38 of 1951, commencing on or after January 1, 2009, or the Central Bank of Sri Lanka established by the Monetary Law Act, (Chapter 422) (with effect from July 1, 2003)

 Provided however, the supply of financial services by a Unit Trust or a Mutual Fund shall not be treated as a financial service for the purpose of this section.”

However, there are various exemptions provided in the first schedule to the VAT Act pertaining to lease transactions as cited below:

Vehicles and equipments:

  1. Provision of leasing facility for such motor coaches with a seating capacity not less than twenty-eight passenger seats and used for such public passenger transport services if such lease agreement is entered into prior to January 1, 2004 and ending on December 31, 2010;
  2. Lorries, tractors or motor coaches with a seating capacity of not less than twenty eight passenger seats, in respect of any rental falling due for payment on or after April 1, 2012;
  3. Bowsers, bulldozers, graders, levellers, excavators, fire fighting vehicles or road tractors for semi-trailers as exempted for Custom purposes under Harmonize Commodity Description and Coding System Numbers in respect of any rental falling due for payment on or after January 1, 2013.
  4. three wheelers in respect of rental falling due for payment on or after January 1, 2005 ;
  5. any bus referred to in item (xv) of paragraph (c).

Residential accommodation:

  1. the supply, lease or rent of residential accommodation other than the supply, lease or rent of residential accommodation by an enterprise which has entered into an agreement with the Board of Investment of Sri Lanka, under section 17 of the Board of Investment of Sri Lanka Law, No. 4 of 1978, on or after April 1, 2001 and the total cost of the projects which such agreement relates is not less than ten million United States dollars or its equivalent in any other currency and the project relates exclusively to the aforesaid supply, lease or rental;

General exemption:

  1. leasing transaction whether financial or operating lease of any asset other than land or building if such agreement is entered into on or after October 25, 2014 and not being any agreement to reschedule any agreement entered prior to October 25, 2014.

With effect from October 25, 2014, subsequent transfer of goods by the lessor to the lessee for a consideration after the termination of lease agreement shall be treated as a lease rental obtained under such agreement and shall be subjected to the provisions pertaining to VAT applicable on lease rentals. 




Lease accounting

Sri Lanka Accounting Standard – LKAS 17[6]

   Lease accounting in Sri Lanka is governed by LKAS 17.  However this standard is not applicable for accounting of leases for exploration or use of non regenerative resources like mineral oil, natural gas and similar resources and licensing agreements on such items like motion picture, films, recordings. It shall not be considered as a basis for lease of investment property which is covered under LKAS 40. Lease can be classified into : 

·         Finance Lease

·         Operating Lease

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Whether a lease is a financial or operating lease depends on the substance of the transaction rather than the term of the contract. The indicators of financial lease are as follows:

  1. When there is transfer of ownership of the asset to the lessee at the end of lease term.
  2. When the lessee has the option to purchase the asset at a price that is lower than the fair value at the end when the option to buy the asset is exercisable.
  3. Irrespective of the transfer of the title of the asset, the lease term of the asset forms major part of the economic life of the asset.
  4. At the inception of the lease, the present value of minimum lease payment is equal to the fair value of the asset.
  5. The leased assets are of such specialized nature that only lessee can use it without major modification.  

 Leases other than finance lease are called operating lease.



Finance Lease

At the inception of the lease, lessee should recognize finance lease as assets and liabilities in their financial statement at an amount equal to the lower of fair value of the leased property and present value of minimum lease payment. Any initial direct cost of the lessee are added to the amount recognized as an asset.

Operating Lease

Lease payments under an operating lease shall be recognized as an expense on a straight-line basis over the lease term unless any other representation is more systematic.


 Sale and leaseback transactions:

A sale and lease back transaction involves sale of an asset by the owner and leasing back the same asset from the buyer. The sale price and lease payment are usually interdependent because they are negotiated as a package. There are two types of sale and lease back transactions. The first one being ‘sale and financial lease back’ and the other ‘sale and operating lease back’. The accounting treatment for the same has been provided below:   


Sale and finance leaseback

If any sale and leaseback transaction results in finance lease, any excess of sale proceeds over the carrying amount shall not be immediately recognized as income by a seller-lessee. It shall be deferred and amortised over the lease term.


Sale and operating leaseback

If any sale and leaseback transaction results in operating lease, any profit or loss should be recognized immediately if the transaction is established at fair value. If the sale price is below fair value and any profit or loss will not be compensated by any future lease payments below market value then it should be recognized immediately else it would be deferred and amortised over the remaining expected lease period in proportion of lease payments as should be the treatment in the case of excess of sale price over fair value.



Despite decades of existence, leasing in Sri Lanka has remained in the nascent stage largely owing to the macro-economic and political factors causing constraints to generic growth and development of the nation. Also, in the past, there have been factors that adversely impacted the growth of leasing, in the form of increase in fuel price, hike in the exchange rates and an anticipated increase in the interest rates. Import taxes on vehicles where increased from 120% to 200%, there was an adverse impact on the equipment leasing market in 2012[7]. Another reason why equipment leasing has not picked up is considering the issues around repossession of the asset. It is also pertinent to note that in the budgetary speech[8] for the year 2016, Finance Minister mentioned that banks will not be allowed to continue leasing activity from 01 June, 2016. This surely will have an impact on the leasing industry.  

In the recent times, there has been an economic revival and growth in the infrastructure sector, making it plausible for leasing to grow. Various tax reliefs provided recently will pave way for ample growth in the economic atmosphere of the country. More  enterprise should resort to being actively involved in this industry to boost their income and provide more financial services to the citizens of the country. With the growth of the economy in various sectors including construction, technology, power plants and shipping etc. there will be more use of equipment in some shape, giving more scope of leasing industry in the country. Sri Lanka is well-equipped to keep a mark in the global leasing arena in the years to come.