COMMERCIAL VEHICLE LEASING

1. COMMERCIAL VEHICLE LEASING PRESENTATION BY T.T.SRINIVASARAGHAVAN MANAGING DIRECTOR SUNDARAM FINANCE LIMITED

2. LEASE DEFINITION • Basically a contract between lessor & lessee. • The lessor retains the ownership & transfers only the right to use the asset. • Consideration for the lease is rentals.

3. FINANCE LEASE Lessor recovers principal plus return through the primary lease. Residual value guaranteed by lessee. Accounting treatment similar to hire purchase or loan. Asset risk borne by the lessee. OPERATING LEASE Satisfies the meaning of a ‘true lease’. Lessor recovers only a part of the principal through primary lease. Balance principal recovered through sale of asset or secondary lease Entire rentals accounted as income by the lessor All asset risks to the lessor. TYPES OF LEASES

4. LEASE Main objective is ‘usage’ and not ‘ownership’. Tax element plays a crucial role. Ownership benefits to the financier. Concept of residual value. HP / HL Ultimate objective is ownership. Interest rate is the key factor. Ownership benefits to the borrower. No concept of residual value LEASE V HIRE PURCHASSE (HP)/ HYPOTHECATION LOAN (HL)

5. COMMERCIAL VEHICLE LEASING • Even during the peak of leasing activity, commercial vehicles (CV) were not actively looked at as a product for lease • Leasing limited to a few well run corporations to add to their fleet of buses under finance lease • Despite the huge potential, CV leasing was not actively pursued due to several impediments • Legal and tax implications coupled with marketing and recovery bottlenecks were major factors impeding CV leasing business

6. TAX IMPLICATIONS INCOME TAX • CVs eligible for higher depreciation @ 40% under IT • Allowability of Higher depreciation claim to lessors questioned but settled by Apex court in their favour (CIT vs. Motor and General Finance Ltd 263 ITR 3 (stat.) • As major portion of the CV market was dominated by the unorganised sector where tax did not play any significant role, such lessees could not utilise the benefit of full tax write off of rentals

7. TAX IMPLICATIONS SALES TAX • CV divided into two parts for tax purposes-CHASSIS & BODY • While chassis suffer local tax, the body is subject to works contract tax • The combination of the two which forms a CV is treated as a new product for (indirect) tax purposes • CV when leased thus attracts lease tax making the transaction completely unviable • The end sale of a CV on completion of the lease term is treated as a first sale attracting tax again which can be as high as 12%

8. SERVICE TAX • Lease income is liable for service tax under Banking and Other Finance Services (BOFS) category @ 8% (10% proposed with cess @ 2% in the Budget, 2004-05) • Service tax is passed on to the lessee

9. Lease vs. Loan • Fully built without service tax • IRR works out to 8.90% p.a. • Fully built with service tax • IRR works out to 9.75% p.a. • Separate body with service tax • IRR works out to 17.62% p.a. Note • The interest rate assumed under the loan option for all the three scenarios is 8% p.a. • The IRR for lease is in pre tax terms • Lease tax has been reckoned @ 12% for the separate body option, which is the prevailing rate

10. LEGAL IMPLICATIONS • Permit regulations require registered owners to hold permit where end sale to a third party becomes a bottleneck for leasing of CVs • Foreclosures pose problems not only in terms of third party sale but also with relatively high settlement figures

11. MARKETING CONSTRAINTS • Leasing is generally attractive to the corporate segment while CV market is dominated by retail players • Where lessee is unable to use tax benefit leasing cannot be a cost effective funding mode • End sale formalities particularly third party sale stand as a major deterrent to leasing of CV

12. POTENTIAL FOR CV LEASE • Despite the constraints, CV leasing has good potential in view of product structuring and flexibility • Completion of large infrastructure projects like the ‘Golden Quadrilateral’ will give give a tremendous fillip to CV demand where leasing can play an effective role • Full service leases offer tremendous opportunities for Lessor and Lessee

13. BUT.. FOR THE WHEELS TO ROLL • Rationalisation of sales tax structure for CV leasing by making it a single point taxable item in every State • Simple, transparent product structures in order to reach the retail market • End sale formalities to be simplified

14. BENEFITS FOR THE LESSOR • CV leasing can increase business volumes significantly • In view of higher depreciation for CVs, CV leasing is an ideal tax planning device • CVs lend themselves ideally to operating leases

15. BENEFITS FOR THE LESSEE • An alternative mode of funding • Ideal for high tax paying CV operators in view of full tax write off • Structured cash flows can be negotiated - Rentals can be tailor made to suit cash flows by varying the structure of payment or the residual value • Replacements made easier by taking to operating lease

16. INTERNATIONAL EXPERIENCE • CV leasing grown impressively over the years • From a mere 4% market share in the 70s, it has grown to over 30% today in most developed countries • Growth attributed to private carriers taking advantage of full service leasing

17. FULL SERVICE LEASING • Advice in choosing the right vehicle for the purpose or usage intended (based on type of goods, climate, terrain etc) • Assistance in vehicle acquisition • Access to full fledged vehicle tracking system • Preventive & corrective maintenance • Support for vehicle disposal

18. FULL SERVICE LEASING • Vehicle insurance, license plates & permits • Emergency road service • Fuel monitoring & fuel tax reporting • Substitute vehicles during repair period • Driver safety & training • Environmental compliance

19. CONCLUSION • CV Leasing has multiple benefits to both the lessor & lessee • CV leasing under utilised in India despite obvious advantages • Indirect tax structure, the major impediment, to be reviewed and rationalised • Full service leasing is the future and has the potential to transform the business

20. THANK YOU