Airlines set to benefit by leasing aircraft from companies based in IFSC

Indian airlines won’t have to withhold tax on payment of rentals for aircraft financially leased through the International Financial Services City (IFSC) in GIFT City, Gujarat, from July 1, reducing the cost of obtaining planes through this route, a top official said.

“The recently modified aircraft leasing framework has further elaborated on financial lease, establishing clarity for aircraft leasing companies in IFSC for both operating lease as well as financial lease,” Ashutosh Sharma, general manager of IFSC, told Moneycontrol.

The government said on June 16 that there will be no withholding tax on the lease rental paid by an Indian lessee to lessors based in IFSC.

“This is a significant enabler as GIFT IFSC-based lessors are now at par with lessors in most competitive foreign jurisdictions in terms of withholding tax on the lease rentals paid by Indian operators. This is another big reason for Indian operators to lease from IFSC,” Sharma said.

The International Financial Services Centres Authority based in GIFT City in Gandhinagar, Gujarat, was established in April 2020 and is mandated to work on the development and regulation of financial products, financial services, and financial institutions in IFSCs in India.

The government said on December 14 that an operating lease, including any hybrid of operating and financial lease of such product or equipment specified by the International Financial Services Centres Authority, would be a ‘financial product’.

Most Indian carriers opt for operating leases of aircraft, which is different from financial leases. An operating lease for an aircraft is normally for a short term, which is less than the life cycle of an aircraft that runs into decades.

In an operating lease, the airline typically does not look at acquiring the asset once the lease payment period is over. In comparison, a finance lease is a long-term lease where the airline has the option to buy the aircraft when the lease period ends.

Sharma said the cost of doing business in IFSC is a fraction of what it would be in other jurisdictions.
Ireland is the most preferred destination for taking planes on lease. According to company executives, the annual cost of registering a special purpose vehicle (SPV) for leasing an aircraft in Ireland is $40,000 to $50,000. This can be done for $6,000 to $10,000 at the IFSC.

An SPV has to be set up for leasing each asset in Ireland. Setting up and maintaining an SPV leads to additional costs.

Historically, most airlines globally, including Indian carriers, opt for a sale and leaseback (SLB) model. Under such transactions, an aircraft ordered by an airline is purchased by a leasing company, which leases it back to the carrier for a monthly rental.

Akasa Air, the Indian airline backed by investor Rakesh Jhunjhunwala that is set to start operations soon, recently signed an agreement with Griffin Global Asset Management Ireland for an SLB of the first five of 72 Boeing MAX aircraft it ordered. A few days after the agreement was signed, the Boeing MAX arrived in India.

With IFSC providing the facility of leasing aircraft in India, costs for airlines are expected to be much lower than taking aircraft on lease from overseas. The new government notification is another step in encouraging Indian carriers to lease aircraft from IFSC.

The government said in the Union Budget 2021 that an aircraft that is returned to the lessors after its lease period ends will be depreciated to zero. This even though the aircraft can be sold for millions of dollars on which capital gains tax can be applied. However, if an entity is based in IFSC, the capital gains tax would be nil.

Besides, if the asset is leased in IFSC and then into India for the first lease, there will be no withholding tax on royalty payments.

“In IFSC, there is no withholding tax on the interest paid to non-residents. Effectively, this means that a lessor in IFSC can raise debt from global investors or financiers at competitive pricing,” Sharma said.

In the two years of its existence, IFSC has leased a variety of aircraft including rotary, fixed-wing, narrow body, large private airplane, and small charter aircraft.