Section 11, The Finance Act, 2013

The Income Tax Act, 2000 is amended by the insertion ofthe following new section immediately after section 56– 56 A(1) Payments made by a person under a finance lease or in acquiring an asset under an installment sale shall be treated as interest and a repayment of capital under a loan made by the lessor or seller to the lessee or buyer, as the case may be . (2) The interest and repayment of capital under subsection (1) shall be calculated as if the loan were a blended loan with interest compounded six monthly. (3) Where an asset is leased under a finance lease, the lessor shall be treated as transferring ownership of the assets to the lessee. (4) Where the lessee under a finance lease returns the assets to the lessor before ownership passes to the lessee other than by reason of this subsection, the lessee shall be treated as transferring ownership of the asset back to the lessor. “Installment sales and finance lease. No. 3 Finance Act 2013 No. 3 Finance Act 20138 9 (5) Where a person transfers an asset under an installment sale or under a finance lease under subsection (3) or (4)– (a) the person shall be treated as receiving an amount in respect of the transfer equal to the market value of the asset immediately before the transfer; and (b) the person who acquires the asset shall be treated as paying an equal amount in acquiring the asset. (6) The Commissioner-General may by Statutory Instrument prescribe that other forms of financing that involve interest substitutes shall be treated in a manner consistent with this section. (7) For the purpose of this section– (a) “blended loan” means a loan– (i) under which payments by the borrower represent in part a payment of interest and in part a repayment of capital; (ii) where the interest part is calculated on capital outstanding at the time of each payment; and (iii) where the rate of interest is uniform over the term of the loan; (b) “finance lease” means a lease where– (i) the lease agreement provides for the transfer of ownership following the end of the lease term or the lessee has an option to acquire the asset after expiry of the lease term for a fixed or presupposed price; (ii) the lease term exceeds 75% of the useful life of the asset; (iii) the estimated market value of the asset after expiry of the lease term is less than 20% of its market value at the start of the lease; (iv) in the case of a lease that commences before the last 25% of the useful life of the asset, the present value of the minimum lease payment equals or exceeds 90% of the market value of the asset at the start of the lease term; or (v) the asset is custom-made for the lessee and after expiry of the lease term the asset will not be of practical use to any person other than the lessee; (c) “installment sale” excludes a sale that provides for commercial periodic interest payable on sales proceeds outstanding ;and No. 3 Finance Act 2013 No. 3 Finance Act 201310 11 (d) ‘lease term” includes an additional period for which the lessee has an option to renew a lease.”