Have you ever wondered how businesses use high-cost machinery without buying it? Or how companies manage cash flow effectively while using expensive assets? Welcome to the world of Equipment Leasing!
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- What is leasing and how it works
- Key terms: Lessor, Lessee, Lease Rental, etc.
- Types of leases – Finance Lease vs. Operating Lease
- Tax implications and GST on leasing
- Accounting treatments in lessee & lessor books
- Real-life examples and case studies
Watch the full breakdown in the video below and don’t forget to comment your doubts!
What is Leasing?
Leasing is a financial arrangement where the owner (lessor) allows another party (lessee) to use an asset for a fixed period in exchange for periodic payments.
Types of Leases
Finance Lease vs. Operating Lease
Finance Lease
- Ownership Transfer: Happens at the end of the lease term.
- Example: Leasing industrial machinery for 10 years, with an option to purchase at a lower price.
- Accounting: Lessee records it as an asset and liability.
Operating Lease
- Ownership: Remains with the lessor.
- Example: Renting office space or vehicles for business use.
- Accounting: Lease payments are recorded as expenses.
GST & Tax Implications on Leasing
GST on Leasing
The CGST Act 2017 (Section 7) considers leasing as a supply of services, making it taxable under GST.
JAIIB Exam | Advance Financial Management | Chapter 24 | Module C [FREE EPDF]
Accounting Treatment
In Lessor’s Books
- Finance Lease: Asset is shown as a receivable (present value of lease payments).
- Operating Lease: Asset remains on the lessor’s balance sheet.
In Lessee’s Books
- Recognizes Right-of-Use (ROU) asset.
- Records lease liability.
Advantages of Leasing
For Lessee
- Preserves Borrowing Capacity
- Full Financing
- Tax Benefits
- Risk Mitigation
For Lessor
- Steady Income
- Ownership Retention
- Depreciation Benefit
Case Study: Buy vs. Lease Decision
| Criteria | Buying (₹) | Leasing (₹) |
|---|---|---|
| Equipment Cost | 50,00,000 | 0 |
| Loan Interest Cost | 6,00,000 | 0 |
Conclusion
By now, you should have a strong grasp of Equipment Leasing, its types, and financial impact.
What’s next?
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