Financial Leases getting a new lease of life?
– Kanakprabha Jethani, Senior Manager | kanak@vinodkothari.com
Background
Leasing industry in India started and grew, as in several other countries, with financial leasing. However, over last several years, it seemed as if financial leases had lost their relevance, for reasons discussed below. While activity in the leasing space was not very brisk, but whatever activity was there was seen mostly in operating leases. Operating leases were sold on the strength of either off-balance sheet treatment, or with lower monthly rentals, or residual value management etc. In case of financial leases, on the other hand, there seemed very little motivation.
Some recent developments seem to be rekindling the interest in financial leases, and if the tax ruling by the ITAT Chennai either goes unchallenged or is affirmed on further appeal, there may be just a new lease of life for financial leases. Coupled with other benefits such as bankruptcy remoteness etc., there may be strong reasons for looking at financial leases, both by lessors and lessees.
In financial year 2021-22, the volume of financial leasing reached to around 7% of the total leasing volumes in the country, compared to 20% in the financial year 16-17[1]. Considering the legal and regulatory construct in India, the reducing volumes of financial leasing make complete sense. However, the recent rulings on taxation of leases may reverse the long known reasons for not doing financial leases.
In this article, the author discusses the reasons why financial leases do not appeal to lessors and lessees and how the recent developments on the taxation aspects of leasing may seem to be bringing financial leases back to life.
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