Introduction
The Aviation Industry in India is one of the fastest growing industries in the nation and currently, India is the third largest in the domestic air passenger market in the world. The passenger traffic including both domestic and international sectors during FY 25 stood at 196.91 million. Compared to the previous financial year, FY 25 saw a 5.6% YoY growth in domestic passenger traffic and 14.2% YoY growth in international passenger traffic itching towards the pre-COVID level.
Nearly 80% of the total commercial fleet in the nation is leased compared to 50% worldwide.With an estimated 2,700 aircraft scheduled to be delivered to India over the next two decades, demand for aviation leasing is expected to rise giving a perfect chance for thisnot so popular industry to develop in the nation.The International Financial Services Centre (“IFSC”) in Gujarat International Financial Tec-City (“GIFTCity”)established as a Special Economic Zone (“SEZ”)is playing a pivotal role as an enabler offering a robust framework and incentives to establish India as a global hub for aircraft leasing.
GIFT City: Taking Off as India’s Aviation Leasing Hub
The flagship initiative of the Government of India, GIFT City, is meant to build up India’s global finance reputation through a friendly regulatory environment, boosting talent and enabling capital movement in the economy and has been labelled as the “smart city of the future”.Government of Indiaoperationalised GIFT Cityas an IFSC in 2015.The Indian government acknowledged the potential of the aircraft financing and leasing industry and the Ministry of Civil Aviation(“MoCA”) established an interministerial working group as a result. This working group determined the essential regulatory conditions needed to support aircraft finance and leasing operations inside the IFSC in its Project Rupee Raftaar Report of 2019.
The Government of India has recognized aircraft leases as a financial productunder Section 3(1)(d) of the International Financial Services Centre Act 2019, with the International Financial Services CentersAuthority (“IFSCA”) introducing regulatory frameworks under the 2021 FC Regulations, requiring lessors to secure a certificate of registration to operate in the IFSC.Among the several incentives provided by IFSC GIFT City are exemptions from capital gains tax, stamp duty, and GST on transactions made through the corporation, as well as a 10-year tax vacation on business earnings.
The present financial advantages and incentives for establishing a leasing unit at IFSC GIFT City offer enormous potential.As of September 2024, there were 27 lessors and 159 leased aviation assets, highlighting the explosive growth in aircraft leasing.Several tax incentives have been offered to IFSC units established to promote the organization’s expansion in India, enlisted below :
- Entities established in the IFSC can opt for a tax holiday for any 10 consecutive years within the first 15 years of operations. Also, each transaction through a separate Special Purpose Vehicle (“SPV”) must claim its own tax holiday.
- Companies in IFSC are subject to a reduced Minimum Alternate Tax (“MAT”) rate of 9% (plus surcharge and cess) on book profits if income is in convertible foreign exchange. Post the tax holiday, domestic companies can opt for a 22% concessional tax rate under the new regime, while foreign company units must follow the old regime with the 9% MAT benefit.
- Aircraft and aircraft engines are eligible for depreciation at 40% on a Written Down Value (WDV) basis, with any unabsorbed depreciation allowed to be carried forward without time limits.
- Units in IFSC are free from Withholding Tax (“WHT”) on interest paid to non-residents, and hence debt funding to aircraft leasing is attractive. WHT will not be levied on aircraft lease payments taken as royalties by non-residents effective April 1, 2022, if the unit at IFSC starts its business before March 31, 2024. Moreover, interest and leasing income of foreign persons from the units at IFSC shall not be taxable in India, thus adding charm to global lessors and lenders.
- Importing aircraft or aircraft engines into the IFSC is exempt from basic customs duty provided the aircraft lands within the SEZ, with specific exceptions due to the lack of an airport. Additionally, Indian airlinesimporting aircraft from an Indian lessor in the IFSC are also exempt from the basic customs duty as long as the aircraft is used for scheduled air operations. However, leasing of aircraft or engines by an IFSC unit to an operator is subject to a 5% Integrated Goods and Services Tax on lease rental payments under forward charge.
GIFT City has numerous non-tax incentives that bring it to the centre stage of aircraft financiers and lessors. Exporting an Aircraft from India requires an operator to hold a GST certificate but these can be hard to come by during a dispute. But for GIFT City based lessors, they can pay GST for their services on a forward charge basis making them able to have more control over the certificate easing the customs compliance.
Also, while it was necessary for the aircraft to be deregistered and re-registered outside the countrybefore export from India, GIFT City offers lessors the ability to keep the aircraft on the Indian register while they search for new operators. There are sizeable cost-saving opportunities available through the GIFT City for domestic airlines. The domestic players can source aircraft at more competitive prices and reduce operating costs with even more favourable terms of leasing. With the increasing demand for air travel, the domestic players can scale up their fleets rapidly thereby making air travel more affordable.
Through a finance lease agreement with HSBC, Air India purchased the country’s first Airbus A350-900 aircraft. This transaction also made Air India the first scheduled carrier to purchase an aircraft from a company registered in the GIFT City. Indigo, the leading domestic carrier also secured its first financing through IFSC in mid-2024 through aviation non-payment insurance supported financing on a brand new A321neo with Credit Agricole Corporate CIB.
Challenges in GIFT City’s Aircraft Leasing Initiative
Despite the significant potential, there are challenges that need to be addressed for the full realization of GIFT City’s impact on aircraft leasing. There are several reasons why foreign lessors are still reluctant to conduct business in India, including the SEZ’s recent establishment and the limited number of banks ready to fund transactions through it. Moreover, as seen by the insolvencies of Kingfisher Airlines, Jet Airways, and Go First, when lessors found it difficult to recover their assets, international lessors’ repossession of aircraft has been a major problem in India.
This problem draws attention to weaknesses in the current legal system, which makes India’s adherence to the Cape Town Convention necessary. To address the weaknesses in the legal framework, the cabinet approved the Protection and Enforcement of Interests in Aircraft Objects Bill, 2024 (“Act”) in January 2025, which has been passed by the Parliament guarantying lessors rights to repossess their leased equipment.
The Act also ratifies the Cape Town Convention, a worldwide agreement that protects lessors’ rights to reclaim their leased expensive equipment, including engines, helicopters, and airplanes, in the event that payments are not made on time .Additionally, it is anticipated that the implementation of this Act will lower credit costs and increase lessors’ trust in the Indian civil aviation market having a positive impact on airfare.
Conclusion
The GIFT City initiative is a transformative one for the aircraft leasing industry in India – offering tax benefits, regulatory advantages, and a favorable business environment. With a stature as a global aviation leasing hub, this would bode well for foreign investment influxes, competitive airline industries, and a booming financial services ecosystem.But this venture could be fully realized only by putting more effort into bringing in international players along with formulating solutions to the problems that are existing. The aviation industry in India could be transformed for many years by the expansion of GIFT City, which is set to become a powerful player in the global aircraft leasing market.
Author Name: Rohaan Mukul is a V Semester | III Year Student at Maharashtra National Law University, Nagpur
