Tax implications are at the heart of resource mobilization and capital budgeting.Any capital expenditure decision must take into care the tax implications involved in the transactions and should try to reduce them.Wet-Leasing of trains has major tax advantages compared to direct initial investment by train operators and thus, it is important to understand crucial tax advantage that Wet-Leasing brings with it.

For analysis to be done, we will assume that current tax conditions stand good and will not change in the near future.The corporate Tax will be assumed at 22 percent and GST at 12 percent on purchase of rolling stock.There is no GST levied on leasing of rolling stock.Further, let us suppose that we have one train-set in consideration that costs Rs 100 crore as basic cost and it is fully financed by debt at the rate of 5 percent.We will consider the codal life of the train to be 20 years.We will assume that Corporations use straight line method of depreciation.We will also assume that it is interest only loan with principal re-payment at the end of the 20 years.

Now, let us create two scenarios: one, when private train Operator(PTO) buys the rolling stock and second,when New Leasing Entity(NLE) buys it and leases it to PTO.

CORPORATE TAX ANALYSIS OF WET-LEASING vs DIRECT PURCHASE

Scenario 1) When PTO buys the rolling stock!

In this case, PTO will spend 100 crores per train-set initially and will have to pay interest of Rs 5 crore every year.Thus, PTO will claim 5 crore as depreciation and 5 crore as interest expense.In total , he will claim Rs 10 crore as reduction due to combined impact of depreciation and interest expense.This will lead to 2.2 crore(.22*10) reduction in the tax liability to the PTO.

Scenario 2) When NLE buys the rolling stock and leases out to PTO!

In this case, NLE will spend 100 crores per train-set initially and will have to pay interest of Rs 5 crore every year.Thus, NLE will claim 5 crore as depreciation and 5 crore as interest expense.In total , he will claim Rs 10 crore as reduction due to combined impact of depreciation and interest expense.This will lead to 2.2 crore(.22*10) reduction in the tax liability to the NLE.

Coming to PTO, if it is assumed that he takes the rolling stock on lease at 6.25(5cr (Basic cost)+.25 cr (interest expense)+1 cr (profit margin)) crore per year.The whole leasing expense of Rs 6.25 crore will be treated as reduction to net income.Thus,Tax benefit enjoyed by PTO will be Rs 1.375 cr (.22 * 6.25).

Thus, total tax benefit enjoyed by NLE+PTO in this scenario is 3.575 crore.

Conclusion:We are able to see that tax outgo in second transaction is 1.375 crore less than first transaction.It implies that the tax benefit enjoyed by the parties in second transaction is whopping 22 percent of the lease amount of that year which is a substantial saving.

Now, Let us come to GST implications of the deal.Interestingly, the GST implications in both the case remain the same.

GOODS AND SERVICES TAX ANALYSIS OF WET-LEASING vs DIRECT PURCHASE

Scenario 1) When PTO buys the rolling stock!

The GST on rolling stock is 12 percent and thus, PTO will have to pay 12 crores on 1 train set costing 100 crores in case it opts to go for direct purchase.Thus, Implication in this case is Rs 12 crore.

Scenario 2) When NLE buys the rolling stock and leases out to PTO!

Currently, no GST is charged by IRFC on the leasing of rolling stock and if the same gets extended to the new leasing entity then it means that NLE will pay Rs 12 crore GST but will not charge any GST to the PTO as no GST is applicable on the leasing of the rolling stock.

Conclusion: GST implications don’t change.

Thus, we can see that clearly Wet-Leasing of trains has major corporate tax benefits whereas it does not change the GST liability and thus, it is evident that Wet-leasing has major financial strength over direct purchase of rolling stock by the PTOs.