Aircraft Leasing in IFSC

In our previous post we had provided a synopsis of the legal framework relating to aircraft leasing in India and Indian IFSCs. In this piece, we will provide an overview of the tax incentives offered to the aircraft leasing activities undertaken from  IFSCs located in India to achieve the dream of developing the GIFT IFSC into a global aircraft leasing hub. We have provided  a few more thoughts to ponder upon as India fuels its engines to realise its objective of ‘letting the common citizen of the country fly’ (Ude Desh Ka Aam Nagrik).

India is world’s third largest aviation market in terms of domestic operations and aviation is also one of the fastest growing industries of our country[1]. Unlike abroad, due to shortage of readily available cash with the airline operators, over 70%2 percent of the aircraft  operating in India are on lease, with the vast majority being leased from Ireland followed by certain other countries like the USA, Singapore, Australia etc[2].  Considering the huge monetary outlay and financial burden of purchasing and ‘owning’ the ‘big bird’, domestic airline companies often rely on leasing the asset instead of outright purchase, especially in emerging economies like India where the aviation industry is at a nascent stage and still evolving. Airline companies purchase aircraft and sell them to a leasing company and get them back on lease for their own use. Sometimes, the leasing company purchases these aircraft directly from manufacturers to lease them to airline operating companies. This helps to remove the aircraft and its associated debt from the airline company’s financials. Unlike the rest of the world, Indian airline operators rely heavily on leased aircraft as they have limited financial capacity to acquire them.  In spite of a compelling business opportunity, not many aircraft lessors are based out of India and there is a heavy reliance on foreign lessors, both due to financial muscle, beneficial tax and legal regimes as well as the ability to enter into complex multi-billion-dollar transactions. The GOI along with the IFSCA – a light touch unified regulator for Indian IFSCs aims to provide the necessary impetus to develop a world class aircraft leasing hub at GIFT IFSC by not only promulgating favorable legal policies, as highlighted in Part A of our blog, but also backstopping a beneficial regulatory regime by globally competitive tax incentives to level the playing field for the participants in the sector.

Tax incentives in IFSC

The GOI has, from time to time, taken several favourable policy measures and brought in suitable tax incentives for the benefit of various stakeholders who could play a part in aircraft leasing and financing business in the GIFT IFSC. It was evident that the aviation industry was one of the key focus points in Union Budget 2021, since several tax incentives were announced by the GOI for the aircraft leasing and financing sector. The tax incentives presently available for aircraft leasing and financing business in the IFSC have been set out below:

Aircraft Leasing unit in IFSC
Aircraft Leasing unit in IFSC

A. Direct Tax

1. A decade of tax holiday:

An aircraft leasing unit setting out to commence operations in the IFSC will have the opportunity to avail a 100% deduction from its income for a period of 10 consecutive assessment years out of the first 15 years of commencement of its operations. Such units in the IFSC have the flexibility to select any 10 years out of the 15-year block.

Further, a special carve out has been provided for such units in the IFSC in case they opt for the concessional income tax rate of 22% (plus surcharge and cess) introduced recently. Though an entity opting for such concessional tax rate is not allowed to avail any other deduction under Chapter VI-A of Income Tax Act, 1961 (“IT Act”) a specific carve out is available under the IT Act for a unit in the IFSC. An aircraft leasing and financing unit in the IFSC opting for the concessional tax rate of 22% would still have the option to avail the benefit of the 10-year tax holiday period as specified above and can opt for the concessional tax regime even thereafter.

Where an aircraft leasing unit in IFSC has earned capital gains from the transfer of an aircraft or aircraft engine previously leased by it to any person, then the aforesaid tax holiday period is also applicable to it, provided it has commenced its operations by March 31, 2024.

2. Concessional rate of Minimum Alternate Tax (“MAT”):

Under the income tax laws, there is a requirement to pay a minimum tax of 15% on the book profits of an assessee, where the total tax liability in a year as per its taxable profits is less than 15% of its book profits. Hence, an assessee availing even a 100% deduction from its profits is required to undertake a minimum tax outgo to the extent of 15% of book profits on account of MAT each year, though MAT paid can be availed as credit from the normal income tax liability arising in future years on account of taxable income.

In order to reduce the burden of MAT and to provide a competitive tax regime to units operating in the IFSC, a beneficial MAT rate of 9% has been introduced for units operating in the IFSC and deriving their income solely in foreign currency, if  their tax liability is less than 9% of their book profits. This is especially beneficial in view of the tax holiday period of 10 years made available for such units, as it would rationalise the total tax outgo in such years.

Foreign lessors
Foreign lessors

3. Tax exemption for foreign lessors:

Royalty or interest income derived by a non-resident from leasing an aircraft to an aircraft leasing and financing unit in IFSC is exempt, provided such unit commences its operations by March 31, 2024. No withholding of tax is required on such aircraft lease payments in the nature of royalty or on interest payable to such non-resident.

This should have a significant impact and help to build interest of foreign aircraft lessors looking out to engage in leasing to aircraft leasing units set up in the IFSC, as aircraft lease rentals received by them would be exempt in India.

B. Indirect Tax

1. Procurement of goods or services

An aircraft leasing and financing unit in IFSC may have to import aircraft through outright purchase or on operating lease. An aircraft leasing unit in the IFSC would not be subject to basic custom duty at the time of procurement of aircraft or its parts from outside India.

In case any aircraft is taken on lease by a unit into the IFSC or it has imported/ procured any services for authorised operations in the IFSC, the same would not be subject to Integrated Good and Service Tax (“GST”), resulting in lowering of the cost of operations.

2. Supply made by aircraft leasing unit

An aircraft leasing unit supplying aircraft for importing by an Indian airline operating company is not subject to basic custom duty subject to the condition that the aircraft is imported for scheduled air operations.

What more wings to a self-reliant aircraft leasing industry in India’s IFSC

GOI has adopted a forward-looking approach to support upcoming aircraft leasing and financing companies in the IFSC, including providing tax incentives. Domestic policy initiatives by GOI such as UDAN – Ude Desh Ka Aam Nagrik will also provide a massive boost to the aviation and travel sector infrastructure in India and IFSCs. The UDAN initiative aims to provide economically viable air transport on regional routes by making air travel more affordable and accessible to all. In furtherance of this objective Airport Authority of India (“AAI”) plans to develop 100 regional airports by 2024. Aircraft leasing or financing is the most profitable segment of the aviation value chain and currently, foreign financiers and lessors are the biggest beneficiaries of these growth opportunities. The vision is that these benefits should pave the way for prospective players in this segment to commence their business activities in the IFSC and participate in the growth story of this sector.

Considering the GOI’s plans and overall vision to kickstart aircraft leasing activities in Indian IFSC in a big way by offering world class facilities and infrastructure, huge tax reliefs and a favourable regulatory regime, prospective participants hoping to make an entry in this area, can use this valuable time to their advantage and explore the opportunities and benefits of setting up shop in IFSC.

Apart from the abovementioned foundation structure enabling aircraft leasing, as a step forward, it will be helpful for the relevant regulators including the IFSCA and DGCA to provide clarity vis-a-vis the practical modalities of implementation such as (i) provisions made in respect of parking facilities available for aircrafts provided to lessors registered with IFSCA and associated costs; (ii) recourse and provisions available to the lenders of an IFSCA registered lessor in the event of bankruptcy or insolvency of such lessor.

Further, given that multiple regulators are involved on several substantive aspects of an aviation transaction, IFSCA’s role as “developer” of financial services and products in IFSC will include an increased and continuous coordination with other sectoral regulators like DGCA, and AAI to develop a complementary ecosystem to increase investor confidence and reduce associated timelines and costs to undertake the aircraft leasing transactions.

Add-ons

IFSCA may also analyse the need for allowing ancillary sophisticated products and infrastructure in a phased manner such as fuel hedging, permitting maintenance, repair and overhaul service providers to set up shop in IFSC who can provide services across the free trade zones in India for the benefit of IFSC lessors, as well as demarcating special geographical areas within the Indian sub-continent for parking and servicing of aircrafts leased from IFSCs to support the sector. For instance Ministry of Civil Aviation, the nodal agency for development and regulation of civil aviation in India, recently also announced a new policy vis-à-vis the Maintenance Repair and Overhaul (“MRO”) businesses to encourage aircraft services operators to carry out aircraft maintenance services within the country which are otherwise being exported out of India. This policy includes reforms such as abolishment of royalty charged by the AAI for MRO services, increasing the time period of leases of land on which MRO facilities are set-up to up to 30 years as opposed to short-term (3-5 years) leases provided currently. Providing impetus to industries providing ancillary and complementary services to aviation sector will be key for the holistic development of sector in terms of processes, efficiency as well cost.

Whether the framework for undertaking aircraft leasing activities promulgated by IFSCA backed by the tax and operational incentives offered by the GOI and the GIFT ecosystem will cement GIFT IFSC’s position as a global aircraft leasing hub will be determined as globally prominent players also explore the opportunities that GIFT IFSC has to offer.

It will also be pertinent to note that in order to make this initiative as a success, a large number of business entities shall have to encouraged to start aircraft leasing and financing activities. It is imperative that the GOI removes the potential hindrances so that new entities do not have to encounter many obstacles. It will further strengthen the government’s “Make in India” initiatives while improving the ease of doing business in India. The authorities may consider functioning like a service provider instead of being an enforcer. If they focus on the broad objective of enhancing the busines friendliness of the GIFT IFSC and ignore minor technical lapses, it would definitely go long way in achieving its objective.

**Disclaimer

This note only provides information on IFSCs In India and the aircraft leasing activities being permitted thereunder. The note is for informational purposes only. The information and/or observations contained in this note do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice. The views expressed in this note do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas.


[1] https://www.ibef.org/industry/indian-aviation.aspx

[2]https://www.pwc.in/assets/pdfs/research-insights/2021/aircraft-leasing-in-india-ready-to-take-off.pdf and https://www.lexology.com/library/detail.aspx?g=33de3767-1246-44ef-8d58-0cbfa7859542

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Partner in the General Corporate Practice at the Gift City and Ahmedabad office of Cyril Amarchand Mangaldas. Ketaki advises on mergers & acquisitions, joint ventures, private equity, venture capital and angel investments, lending and financing transactions and other general corporate matters across all…

Partner in the General Corporate Practice at the Gift City and Ahmedabad office of Cyril Amarchand Mangaldas. Ketaki advises on mergers & acquisitions, joint ventures, private equity, venture capital and angel investments, lending and financing transactions and other general corporate matters across all sectors and including cross border transactions. She can be reached at ketaki.mehta@cyrilshroff.com

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Partner in the Tax & Private Client Practice at the Mumbai office of Cyril Amarchand Mangaldas. Kunal specialises in various aspects of direct tax, such as corporate tax, M & A transactions, international tax and also specialises in succession and estate planning. He can be reached at kunal.savani@cyrilshroff.com

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Associate in the General Corporate Practice at the Ahmedabad office of Cyril Amarchand Mangaldas. Devanshi has graduated from Gujarat National Law University, in 2018 and specializes in general corporate advisory, inbound and outbound investments, mergers and acquisitions, joint ventures and business transfers. She can be reached at devanshi.dalal@cyrilshroff.com

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