Ch.6-Hire Purchase Finance
Ch.6-Hire Purchase Finance
Ch.6-Hire Purchase Finance
Cont
Lease Financing
Capitalization of the asset is done in the books of the leasing co. Leasing used as a source of financing for high cost assets like ships, machinery, airplanes etc
HP Financing
Capitalization of the asset is done in the books of the hirer.
HP use as a source of finance for low cost assets as automobiles, office equipments etc.
Cont..
Lease Financing
No Down payment required for using leased assets.
HP Financing
Down payment is required to be made for acquiring the asset, and margin of 20-25% maintained. In hirers books ,HP assets shown as an asset, and instalments payable as a liability.
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LEGAL FRAMEWORK
There is no legislation dealing with hirepurchase transaction in India. The hire-purchase act was passed in 1972. The provision of the act are not inconsistent with the general law and can be followed as a guideline particularly where no provision exist in general laws which, in the absence of any specific law, govern the hire-purchase transaction.
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SALES VS BAILMENT
Bailment involves a mere transfer of possession of goods on the condition that the goods will be returned after the purpose is over In a sale, there is a conveyance of property in goods from seller to buyer for a price, and the buyer becomes the owner of goods and can deal with them in the manner he likes.
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PRICE
The price means the money consideration for transfer of property in goods from the seller to the buyer. EARNEST MONEY or security deposit:
In certain contract the buyer pays an amount in advance as earnest money deposit or as a security deposit, for the due performance on his part of the contract.
EM is liable to be forfeited if the buyer fails to perform his part and the contract goes off.
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DELIVERY OF GOODS
Delivery of goods: Delivery means voluntary transfer of possession of goods from one person to another. Delivery may be
actual symbolic constructive.
Delivery is said to be actual when the goods are handed over physically. A symbolic delivery takes place where the goods are bulky and incapable of actual delivery
A constructive delivery is a delivery by attornment which takes place when the person in possession of the goods acknowledges that he holds the goods on behalf and at the disposal of the other person.
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RULES OF DELIVERY
PART DELIVERY
A delivery of the part of the goods, in progress of the delivery of the whole, amounts to delivery of the whole.
Hire-purchase Agreement
A hire-purchase agreement is in many ways similar to a lease agreement, in so far as the terms and conditions are concerned. The important clauses in a hire-purchase agreement are:
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Contd
1. Nature of Agreement : Stating the nature, term and commencement of the agreement. 2. Delivery of Equipment : The place and time of delivery and the hirers liability to bear delivery charges. 3. Location : The place where the equipment shall be kept during the period of hire.
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Contd
4 .Inspection : That the hirer has examined the equipment and is satisfied with it. 5. Hire-Charges : To be paid by the hirer, the schedule, the rate of interest/penalty for delayed payment/default. 6.Repairs : The hirer to obtain at his cost, insurance on the equipment and to hand over the insurance policies to the owner. 7.Alteration : The hirer not to make any alterations, and so on to the equipment , without prior consent of the owner.
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Contd
8. Termination : The events or acts of hirer that would constitute a default eligible to terminate the agreement. 9. Risk : Of loss and damage to be borne by the hirer. 10. Registration and fees : The hirer to comply with the relevant laws, obtain registration and bear all requisite fees.
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INCOME TAX
Hire-purchase,as a financing alternative, offers tax benefits both to the hirevendor(hire-purchase finance company) and the hire-purchaser (user of the asset). 1) Assessment of Hire-purchaser (hirer) 2) Assessment of Owner (Hire-vendor)
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Sales-Tax Aspects
Hire-purchase is demand to be sale Its payable by the owner even if transaction does not fructify into a sale No refund of sales tax
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Conti..
1) 2) 3) 4) Delivery v/s Transfer of Property Taxable Event Taxable Quantum States Entitled to Impose Tax Rate of tax
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Interest Rate
Companies have to pay interest-tax under the Interest-tax Act,1974 Total amount of interest earned- bad debts in the previous year @ 2%
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What entry is made on purchase of an asset on hire purchase ? Asset on hire purchase a/c to hire purchase vendor a/c (with the cash price of assets)
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FINANCIAL EVALUATION
The framework of financial evaluation of a hire-purchase both the hirers as well the finance companys view point.
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Decision-criterion
The decision-criterion from the point of view of a hirer is the cost of hirepurchase vis--vis the cost of leasing.
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A) Cost of hire-purchase:
Down payment (+) service charges (+) P.v of hire purchase payments discounted by cost of debt (-) P.v of depreciation tax shield discounted by cost of capital (-) P.v of net salvage value discount by cost of capital
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B) Cost of leasing
Lease management fee (+) P.v of lease payments discounted by Kd. (-) P.v of tax shield on lease payments and lease mgmt. fees discounted by Kc. (+) P.v of interest tax shield on hire purchase discounted by Kc.
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(-):Present value of interest tax on finance income(interest) (-): Present value of interest tax on finance income(interest) meted for interest tex (-): Present value of interest tax on documentation and service fee
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(-):Initial investment (-):Initial direct costs (-):Present value of tax liability on lease rentals and lease management fee
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THANK YOU.
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