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India is presently the world’s fastest-growing aviation market with demand surpassing the supply of aircraft and a strong order book of more than 1,500 aircraft from airlines in India. India’s skies are dominated by low-cost carrier IndiGo which holds around 60% market share and the Tata group airlines, with around 30% market share.
As more than 80% of India’s commercial fleet is leased, there is tremendous potential for aircraft leasing activity within India. Even if some of these aircraft are leased from India, it will bring down the costs as the leases will be immune to exchange rate volatility. Leasing done through foreign jurisdictions like Ireland is vulnerable to exchange rate fluctuations.
GIFT City – Can it snatch leasing business from Dublin?
The Government of India has recognized the potential of the aircraft leasing and financing business. Accordingly, in October 2020, ‘aircraft lease’ was designated as a ‘financial product’ that can be offered by entities set up in International Financial Services Centres (“IFSCs”) in India. IFSCs are essentially special economic zones dedicated to financial services. IFSCs provide tax benefits and flexibility in foreign currency transactions. In the last few years, there has been a surge in activity from the Gift City, India’s first IFSC, with more than 28 aircraft lessors already registered, which have leased more than 120 aviation assets, including aircraft, helicopters and engines.
The success of GIFT city to a large extent hinges on tax incentives. Recognising this, the Indian Government provides a range of tax benefits to units established in the GIFT City, similar to some of the well-established aircraft leasing hubs like Ireland, Singapore, and Dubai. These tax benefits include a tax holiday for any 10 consecutive years out of 15 years of operation, exemption from capital gains tax on aircraft sales during the tax holiday period, and similar exemptions for non-residents selling shares in special purpose vehicles (SPVs). Further, the tax perks also include no minimum alternate tax for those opting for the new tax regime, tax exemptions on royalty and interest income for non-resident lessors leasing to IFSC units, and waivers on customs duties for aircraft imports and stamp duties related to unit setup and property acquisition—subject to specific conditions.
The tax holiday and most of the other tax benefits are, however, contingent upon IFSC units commencing operations by March 31, 2025. This deadline is challenging, particularly for aircraft lessors who often establish multiple SPVs; those launching after the cutoff may miss out on most of these tax advantages.
Moreover, most aircraft lessors currently operating in India are well-established in Ireland, leaving little incentive for them to transition to a GIFT City structure from a tax perspective. While GIFT City offers a ten-year tax holiday, uncertainty remains about the continuation of benefits beyond that period. Past instances of retrospective taxation, although unlikely in this context, loom large in the minds of industry practitioners, who must weigh these historical precedents when discussing the merits and drawbacks of GIFT City.
Repossession of aircraft – is it still a nightmare in India?
The recent Go First crises where lessors were prevented from even inspecting their aircraft, let alone repossessing them for the longest time raised serious questions on India’s credibility as a nation wanting to uphold the Cape Town Convention. It was felt that this episode would punch a hole in the Government’s dream of making India an aviation hub.
However, the Government was quick (or maybe not so quick) to act and has taken steps to address the issues faced by lessors when an airline goes bankrupt. A notification was issued stating that the extant provisions of the Indian Insolvency and Bankruptcy Code, 2016, concerning the application of moratorium, have been exempted for transactions, arrangements or agreements governed by the Cape Town Convention relating to aircraft, aircraft engines, airframes and helicopters. Accordingly, the lessors would now be able to swiftly repossess their aircraft where an operator files for bankruptcy.
Building a strong ecosystem for maintenance, repair and overhaul services (MRO)
India cannot become an aviation hub unless it reduces its reliance on foreign facilities by enhancing its local MRO capabilities. The implementation of a uniform 5% tax rate on all imports of aircraft parts and components—previously, this rate varied from 5% to 28%—has taken a significant step in this direction.
The government has extended the period for exporting goods imported for repairs from six months to one year and custom duty on tools and toolkits is also exempted.
These recent initiatives aim to develop India as a leasing and financing hub and encourage the established global aircraft finance and leasing entities to set up in India.
We anticipate continued growth in passenger numbers for Indian carriers, driven by factors such as increasing disposable incomes, urbanization and government initiatives to boost regional connectivity. This will naturally lead airlines to expand their fleet to meet the growing demand, acquiring new aircraft and entering leasing arrangements to support their operations.
Note: The article is authored by Mansi Singh, Partner and Amit Baid, Practice Head (Tax) at BTG Advaya
