Export of Goods on Lease, Hire, etc., from India

[YAGAY andSUN]

The export of goods on lease, hire, or similar arrangements from India involves a unique set of regulations and requirements distinct from outright sales. This type of export arrangement is often employed for high-value equipment, machinery, or specialized goods that a foreign entity needs temporarily, without the intention of full ownership.

The export of goods on lease, hire, or similar arrangements refers to a situation where goods are temporarily transferred to a foreign party for use, with the intention of returning the goods after a specified period. This is different from outright sales, as the ownership of the goods typically remains with the exporter, and the foreign party only has the right to use the goods during the lease or hire period.

Below is an overview of the key aspects of such exports, the applicable legal framework, compliance issues, and solutions for businesses in India engaging in such transactions.

1. Overview

Exporting goods on lease, hire, or similar arrangements allows Indian exporters to send goods abroad for temporary use while retaining ownership. These agreements often involve goods like machinery, industrial equipment, vehicles, or specialized tools that are leased or hired for a fixed period. After the term ends, the goods are typically returned to India.

Such arrangements can be structured as:

• Lease agreements (long-term, rental agreements)
• Hire agreements (short-term rental)
• Hire-purchase agreements (with an option to purchase)

Types of Agreements

• Lease Agreements: The exporter provides the goods for temporary use in exchange for periodic payments. At the end of the lease period, the goods may be returned, and in some cases, the lessee may have the option to purchase the goods.
• Hire Agreements: Similar to leases, but typically with shorter-term commitments and different conditions for usage and payment.
• Hire-Purchase Agreements: A hybrid model, where the foreign party hires the goods with an option to buy them after a certain period, typically through instalment payments

These agreements must address the rights and responsibilities of both parties, such as usage terms, maintenance, insurance, and return conditions.

2. Risk and Liability

• The responsibility for maintaining and returning the goods in the same condition as they were leased or hired often falls to the importer (lessee/hirer). The lease or hire agreement typically outlines the obligations regarding maintenance, insurance, and return conditions.
• Risk of damage or loss during the lease or hire period is usually addressed within the terms of the contract, with parties agreeing on insurance requirements.

3. Relevant Legislation and Applicable Laws

Several laws, rules, and regulations govern the export of goods on lease or hire from India. Some of the key legislations and provisions include:

• The Foreign Trade (Development and Regulation) Act, 1992: This act lays down the framework for the export and import of goods from India. It includes rules for licensing and export policies.
• The Customs Act, 1962: Governs the import and export of goods and services and includes provisions for temporary export, as is the case in leasing or hiring arrangements.
• Goods and Services Tax (GST) Act, 2017: Under GST, lease and hire services are taxable, and exporters may be required to charge and remit GST on the rental income. However, exporters can also avail of GST exemptions or refunds under certain conditions for export transactions.
• Foreign Exchange Management Act (FEMA), 1999: Provides guidelines on foreign exchange transactions, including international payments and receipts for lease or hire agreements.
• The Income Tax Act, 1961: Income generated from lease and hire transactions is taxable under the provisions of the Act, and exporters must comply with tax regulations in both India and the destination country.
• The Lease Financing Act, 1995: Provides rules related to the legal and financial aspects of leasing goods.

4. Customs Duties & GST

• Customs Regulations: Goods exported under lease or hire arrangements are generally subject to the same export regulations as goods being sold, but with a focus on temporary exportation. Some countries may offer exemptions or temporary importation rules for goods that are expected to be returned.
• Duties and Taxes: The export may be subject to taxes, duties, or fees in both the exporting and importing countries, though in certain cases, temporary exportation may allow for reduced duties or tax exemptions.

5. Time Period Involved

• The time period for which goods are leased or hired typically depends on the specific agreement between the exporter and the importer.
• Generally, the period can range from a few months to several years, and the goods are expected to be returned once the term expires.
• The time frame should be clearly stated in the contract, as any extensions or renewals may require separate documentation and customs processing.

6. Legal Considerations

• Contract Terms: Clearly defined terms regarding the duration of use, condition of goods, maintenance obligations, and responsibilities for return must be established in the contract.
• Jurisdiction and Dispute Resolution: Since this involves cross-border transactions, jurisdiction and dispute resolution procedures should be defined, often specifying arbitration or international law for resolving issues that arise.

7. Limitations

There are several limitations to exporting goods on lease or hire arrangements from India:

• Customs Regulations: Temporary export rules may apply, and customs authorities may impose restrictions or require guarantees to ensure the goods are returned after use.
• Taxes and Duties: Goods exported on lease or hire may attract applicable duties in the importing country. The Indian exporter must comply with both Indian GST and the tax obligations in the foreign jurisdiction.
• Lack of Legal Precedents: There is limited case law or judicial clarification specifically addressing lease or hire arrangements in international trade, leading to uncertainties in some cases.
• Insurance and Risk: Exporters may face challenges in ensuring their goods are protected while abroad. Insurance for leased or hired goods often involves complex international policies.
• International Regulations: Different countries may have varying legal requirements regarding temporary imports, affecting how goods are treated when they enter the foreign market.

8. Compliances and Documentation

When exporting goods on lease or hire from India, businesses must ensure compliance with the following requirements:

• Export Documentation: This includes the commercial invoice, packing list, export declaration, and a customs bill of entry for temporary exports. The exporter must ensure the goods are appropriately classified for customs purposes.
• Leasing or Hiring Agreement: A comprehensive contract outlining the terms, including usage, maintenance, responsibility for damages, insurance, return procedures, and payment terms, must be drafted and signed.
• GST Compliance: The exporter must charge GST on the rental or hire charges, file GST returns, and potentially claim refund benefits for export services if applicable.
• Export License (if applicable): In some cases, an export license may be required for specific goods, particularly in sectors like defence, sensitive technologies, or where the Export Control List applies.
• FEMA and RBI Compliance: Cross-border transactions involving foreign payments and receipts for lease or hire agreements must comply with FEMA guidelines and be reported to the Reserve Bank of India (RBI).

Relevant para A.15 and A.16 of RBI Master Direction – Export of Goods and Service as updated on 16-01-2025

A.15 Export of goods on lease, hire, etc.:

Prior approval of the Reserve Bank is required for export of machinery, equipment, etc., on lease, hire basis under agreement with the overseas lessee against collection of lease rentals/hire charges and ultimate re-import. Exporters should apply for necessary permission, through an AD Category – I banks, to the Regional Office concerned of the Reserve Bank, giving full particulars of the goods to be exported.

A.16 Export on elongated credit terms:

Exporters intending to export goods on elongated credit terms may submit their proposals giving full particulars through their banks for consideration to the Regional Office concerned of the Reserve Bank.

9. Accounting Treatment

• Goods exported on lease or hire are often classified differently from outright sales in accounting records, as the exporter retains ownership. Payments received are typically treated as rental income rather than sales revenue.

10. Issues and Challenges

• Customs and Import Duties: Some importing countries may impose significant customs duties, taxes, or requirements that complicate the return of goods after the lease term.
• Logistics and Transportation: The cost and risk of transporting leased or hired goods back to India can be high, and delays can lead to disputes.
• Dispute Resolution: Legal challenges may arise over the enforcement of lease or hire agreements, especially when international legal frameworks are involved.
• Documentation Errors: Mistakes in export paperwork, especially when dealing with temporary exports, can lead to delays, fines, or penalties.

11. Solutions and Way Forward

• Clear Contract Terms: Exporters and importers should ensure that lease or hire agreements are thoroughly documented and include all necessary terms for maintenance, insurance, and the return process. Dispute resolution mechanisms, including international arbitration, should be specified.
• International Legal Advisory: Consulting with legal experts familiar with international leasing laws can help address regulatory complexities and ensure compliance.
• GST and Tax Management: Businesses should work closely with tax consultants to ensure proper application of GST for cross-border lease transactions, particularly when claiming refunds or exemptions.
• Insurance Solutions: Exporters should secure comprehensive international insurance to cover the goods against damage or loss during the lease or hire period.
• Improving Documentation Procedures: Ensuring proper documentation at every step of the export process can help avoid issues with customs clearance and re-entry of goods.

12. Conclusion

• Exporting goods on lease or hire arrangements can be advantageous for both the exporter and importer, as it allows for flexibility in the use of high-cost equipment or goods without the need for permanent ownership transfer. However, managing the terms and understanding international regulations is crucial for ensuring a smooth transaction.
• The export of goods on lease, hire, or similar arrangements from India provides flexibility for businesses and international clients, especially when high-value or specialized goods are involved. However, it requires careful navigation of regulatory and legal frameworks, including compliance with customs, tax, and international leasing laws.
• By understanding the relevant regulations, ensuring thorough documentation, addressing potential risks through insurance, and utilizing proper legal structures, businesses can successfully engage in such exports. Continuous engagement with legal and tax professionals is essential for mitigating risks and maximizing the potential benefits of cross-border leasing and hiring arrangements.