Relief as banks, RRA and MPs agree on new leasing law model

After days of finger pointing and discussions, financial institutions, legislators and the Rwanda Revenue Authority have finally agreed on a new leasing model to replace the current one. The move is expected to ease access to capital equipment to boost the industrial sector.
Most SMEs have found it hard to secure loan leases to buy equipment like this. But this could change after stakeholders agreed on a new model to make the facility affordable.
Most SMEs have found it hard to secure loan leases to buy equipment like this. But this could change after stakeholders agreed on a new model to make the facility affordable.

After days of finger pointing and discussions, financial institutions, legislators and the Rwanda Revenue Authority have finally agreed on a new leasing model to replace the current one. The move is expected to ease access to capital equipment to boost the industrial sector.

According to the Members of Parliament, the new model will help small-and-medium enterprises involved in processing thrive.

“Lease loans are important to enable SMEs access capital equipment to increases economic activity and boost growth and job-creation,” Connie Bwiza Sekamana, the chairperson of the parliamentary economic and trade standing commission, said.

Sekamana urged bankers to support the new leasing model, noting that without financial institutions’ help the proposed law could face the similar challenges like the current one.

The old lease law has faced numerous problems, with business people accusing banks and RRA of cheating them. Business people claimed that RRA was charging them value added tax (VAT) twice – on the equipment and loan repayments, while banks said withholding tax was high.

A lease loan attracts interest rate of 18 per cent while VAT is also 18 per cent. SMEs and micro-finance institutions even took the matter of double taxation on lease loans to the Prime Minister, who ordered RRA to address the businesspeople’s complaint in mid this year.

Eric Rwigamba, the financial sector development director general at Ministry of Finance, challenged banks to explain why the old lease law has not produced the desired results.

He suggested that a survey be conducted to find out why the 2005 law failed to ensure the loopholes are plugged in the proposed law amendment.

This was during a consultative meeting of stakeholers organised by the Ministry of Finance on Friday to discuss the proposed leasing law.

Banks present their case

According bankers, VAT imposed on lease interest is partly responsible for low uptake of leases, with clients opting for ordinary loans.  Callixte Nyilindikwe, the head of business banking at I&M Bank, however, urged MPs to adopt a balanced approach that will cater for the interests of banks as well as those of SMEs and other borrowers if the proposed law is to work.

“While the lease agreement provides for transfer of ownership following the end of the lease term, with the lessee having an option to acquire the asset after expiry of the lease term for a fixed or presupposed price, the biggest challenge banks normally face is how to depreciate the asset on the secondary market.”

Peter Rwema, the Association of Microfinance Institutions of Rwanda (AMIR) director of research and development, said the proposed law amendment should consider lease loans as any other service loan and scrap the 18 per cent VAT leaseholders pay on collateral and when repaying the loan.

“This makes lease loans expensive,” Rwema pointed out.

Alex Bahizi, the Bank of Kigali legal service manager, noted that whatever law or lease model is adopted, the issue of risk management and product depreciation should urgently be addressed.

“Banks should have no problem with the leases if banks are allowed to adjust output tax on repossessed goods to take account of the expiry of a lease. This also helps in managing risks, making it essential for banks to have a say on depreciation,” he argued.

Aimable Kayigi Habiyambere, the deputy commissioner for large taxpayers at the Rwanda Revenue Authority, challenged banks to make the lease product work for SMEs and stop using the tax body as an excuse for failure to make it attractive to borrowers.

“Our intention is not to get into way for economic development because we know this helps create a large tax base for revenue collection. Therefore, supporting SMEs to grow and thrive so that they generate revenue for the economy is in our interest.”

Habiyambere denied allegations that the tax body doubled taxes on lease loans.

“Let banks be open and tell us why they think VAT on lease is responsible for its failure because, currently, they have 100 per cent right to claim import tax while the leaseholder is charged VAT, claimable only when he is registered,” Habiyambere said.

Proposed model entitles


If the new lease model is approved by the Cabinet , leasing companies will sale equipment to the bank and only invoice the lessee VAT at the point of purchase. The bank will then lease the equipment to the lessee VAT free on lease payment since it will have been paid earlier.

Banks will only pay VAT on behalf of the lessee if he cannot afford at the time of purchase of the equipment.

The lessee will then use the asset to conduct business.

Operating lease – rentals will in this case be looked at as investment income and finance lease rentals as business income with  provision for the lessee having an option to acquire the asset after expiry of the lease term for a fixed or presupposed price.

According Riadh Naouar, a leasing expert at International Finance Corporation of the World Bank, the model provides for 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.

Projected outcomes


According to Naouar, the model will have a high development impact, particularly for SMEs by expanding the market for equipment sales in a country, bringing in new technology, increasing incentives for capital investment and equipment upgrades.

“Increasing competition with other forms of credit delivery within an economy will lead to increased efficiency and diversity of the local financial market.”

Steps to encourage leasing


Leasing or VAT law needs to define treatment for finance leases, amendments to give intended effect to tax exemptions for lessees (for instance, the deemed owner status) and exemption from stamp duty.

Tax and accounting definitions of finance lease should be matched and rules for SMEs simplified, for example, ability to claim capital deductions over lease term or deduct lease payments. There should also be no withholding tax on domestic interest.

Subscribe to The New Times E-Paper


You want to chat directly with us? Send us a message on WhatsApp at +250 788 310 999    

 

Follow The New Times on Google News