Lessor and lessee enjoys various benefits under leasing agreement in India such as Income tax benefits, sales tax benefits, modernization through lease finance etc.
Benefits to lessor and lessee under leasing agreement:
1. Lessor can claim depreciation
As the equipment is purchased by the lessor and handed over to the lessee, the ownership is retained by the lessor but only the possession is given to the lessee. The lessor claims depreciation and thereby gets some concessions under the Income Tax Act. The depreciation claimed is also on the basis of Written down value method (WDV) .
2. Sales tax benefits for lessor
Sales tax will be paid by the lessor as the equipment is bought by him. But later on, under financial lease he can claim a part of the sales tax from the lessee, when the equipment is transferred to the lessee. The lessee will be paying the sales tax on lesser amount. This is so because by the time the property or equipment is sold to him, its value gets reduced.
3. Income tax benefits for lessee
The lessee gets certain benefits in the payment of rent, maintenance of the equipment and other promotional expenditure incurred by him in keeping the equipment operational. For all these expenses, the lessee will be claiming tax benefits under the Indian Income Tax Act. The benefits will be more when initial rentals are higher. During the later part of the period, it will become less.
4. Modernization through lease finance
With the enhancement in the limit on investment on fixed capital for small scale industries and tiny sector, the importance of leasing companies has gone up. At present, small scale industries can have fixed capital upto Rs. 1 crore and tiny sector up to Rs. 2 lakhs. Hence, most of the small scale industries are going in for modernization through lease finance. The tiny sector is also putting to use the benefit of leasing companies.
The public sector commercial banks have entered the field of leasing and factoring by starting separate subsidiary companies. State Bank of India and Canara Bank are the pioneering banks in leasing finance which is now being adopted by other commercial banks. Even foreign banks are taking up leasing finance.
Thus, leasing finance provides enough opportunity for both lessor and lessee to gain in both income tax and sales tax, as a result of which there is more scope for this kind of business in India in the future.