Direct Taxes Code (DTC) proposes to do the necessary for bringing some certainty on tax treatment of a financial lease, but this is not sufficient to make it a preferred mode of finance, say industry and tax experts. The levy of multiple taxes on a financial lease continued to hamper their widespread usage, they said.
In the DTC regime, a lessee under a financial lease will be considered as owner of an asset and allowed to claim depreciation for tax purposes. The existing income-tax law is silent on financial lease even as the Central Board of Direct Taxes (CBDT) and the Supreme Court had held out that it was the lessor who could claim depreciation under financial lease agreements.
The DTC Bill has defined a “financial lease” — a first such effort in the income-tax legislation.
By specifying that it is the lessee in a financial lease who can claim depreciation, the DTC will bring the tax treatment on financial lease on a par with the accounting norms specified for such transactions in AS-19 (Accounting for Lease). It is the lessee in a financial lease who could capitalise an asset and claim depreciation, the Institute of Chartered Accountants of India (ICAI) had said in AS-19.
“The DTC proposal to specify that the lessee will be allowed to claim depreciation under a financial lease is a welcome step. It provides certainty on taxation front. But financial lease as a mode of finance will take off only when the issue of multiple taxation is addressed. The biggest issue is that of service tax on lease rentals. There is also the issue of VAT as leasing is considered as deemed sale by State Governments,” Mr Raman Agarwal, Co-Chairman, Finance Industry Development Council (FIDC) said.
In the case of airlines, who go in for leasing of aircraft to expand fleet, the proposed change in tax treatment for financial lease may not bring immediate benefits. This is because most domestic airlines have accumulated losses and tax break on depreciation is not a consideration for them, sources in the airline industry said.
It is also industry practice that taxes, if any, are on lessee’s account. “However, tax implications for financial and operating leases are different. The existence of DTAA with the lessor’s country also has bearing on the lessee’s tax liability,” said Mr Samyukth Sridharan, Chief Commercial Officer, SpiceJet.
Till date, SpiceJet has gone in only for operating leases.
Mr Prashant Khatore, Tax Partner, Ernst & Young, said that the DTC proposal on financial lease will make the law clear and avoid needless litigation. “Under the current law there is an issue on availability of depreciation to lessor under finance lease with conflicting views. However, under the DTC a lessee under financial lease is considered to be owner for purpose of allow-ablity of depreciation.”
