Leasing Firms Cut Rates To Claim Depreciation Benefits

If a business is booked before September 30, leasing companies can avail of full year's depreciation benefit, but if they miss the deadline, they can get only half the depreciation benefit. The rate of interest also depends on the extent of depreciation which is available on different kinds of assets.

For example, 100 per cent depreciation is available on assets like boilers, while the benefit is 50 per cent on other assets.

Highly-rated corporates are now able to access finance on 100 per cent depreciable assets at 8 to 12 per cent, which is nearly half of the bank lending rates.

 

Corporates with middle-level rating, like "adequate safety", are getting lease finance for in the range of 12 to 15 per cent.

Trade volumes on lease finance have, however, come down after the introduction of the minimum alternative tax, which will affect both the finance companies and borrowing companies.The recent decision of the Central Board of Direct Taxes to curb sale and lease back assets has also reduced the volume of transactions on old assets to a trickle.

Though lease finance offers depreciation benefit, the entire amount of rentals has come under the minimum alternative tax (MAT). Some finance companies, such as VLS Finance, feel they are more comfortable on hire purchase business where only the interest income in charged.

Finance companies charge 3 per cent to 4 per cent more on hire purchase. Hire purchase also offers a finance company the advantage of one-year exposure, against three years' exposure on lease finance.

In lease finance, the assets are shown in the name of the leasing company, which can obtain tax benefit by way of depreciation and consequently charge lower interest rates. The depreciation can result in tax exemption of about 40 per cent, which is factored into interest rate calculations.

As banks have drastically reduced the flow of funds to finance companies, they are depending heavily on fixed deposits and incurring a high fund cost exceeding 24 per cent to 25 per cent.

The funds cost would have reflected in their lending rates but for the tax advantages available in the form of depreciation on leased assets.But once the half-year deadline is over, leasing firms feel the interest rates climbing.