MC Explains| The case for turning India into an aircraft leasing hub

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The momentum for making India a global aircraft leasing hub picked up in Budget 2023-24, passed by Parliament recently. The move is required in a country where an estimated 80-85 percent of domestic airline fleets are funded through operating leases.

Why are the changes in the Budget for leasing aircraft important?

Airlines use two types of aircraft — those they purchase directly from manufacturers and those they lease from leasing companies. Under a leasing arrangement, a company buys aircraft from the manufacturer and then leases them to airlines.

According to estimates by consulting firm CAPA, Indian carriers are set to order between 1,000 and 1,200 aircraft in the next two years. A leasing hub in India will help; even if some of these aircraft are leased in India, it will bring down the cost as the leases will be immune to exchange rate volatility. Leasing done through foreign jurisdictions like Ireland are vulnerable to exchange rate fluctuations.

The latest Budget intends to give a boost to Indian leasing companies through the International Financial Services Centres Authority (IFSCA), which was established in April 2020 under the International Financial Services Centres Authority Act, 2019. It is headquartered in Gift City, Gandhinagar.

What are the changes in the Budget for aircraft leasing companies?

In Budget 2023-24, some amendments have been made for encouraging more leasing companies to come up through which airlines can start leasing aircraft through IFSCA.

Says Ashutosh Sharma, General Manager, Gift IFSC: “These budget changes coupled with the changes made in the last few years show strong commitment of the government as well as IFSCA towards developing Gift IFSC as aircraft leasing hub. Foreign lessors shall seriously consider setting up a presence in Gift IFSC to become competitive and Indian operators shall also insist on leasing aircraft from Gift IFSC.”

For starters, non-resident shareholders and other IFSC units are exempt from capital gains on transfer of equity shares of a IFSC unit primarily engaged in aircraft leasing. This exemption is available for a specified period and is subject to conditions.

Gains arising from the sale of aircraft are not taxable in the hands of the IFSC unit, subject to conditions. With this amendment, even the gains arising from sale of equity shares of an IFSC unit engaged in aircraft leasing will not be taxable. Hence, non-resident lessors will have flexibility to structure their operations in an IFSC unit because there will be no income tax on the sale of aircraft and sale of equity shares in an IFSC unit.

In the case of aircraft sale, administrative formalities of novation of the lease are required to be carried out. This involves re-negotiating the lease with Indian airlines. With this amendment, non-resident lessors will have the flexibility to sell shares in the Special Purpose Vehicle (SPV) rather than the aircraft and avoid the process of novation of the lease.Novation is an agreement to allow for the substitution of a new party for an existing one.

What was the situation before the changes?

Before the amendments, the dividend earned by non-resident shareholders from an IFSC unit was taxable at the rate of 20 percent (plus applicable surcharge and cess), which has now been reduced to 10 per cent. Further, the return of income filed by non-resident shareholders is scrutinized after a couple of years by Indian revenue authorities. Hence, there is always uncertainty as to whether the authorities will accept the claim of a concessional tax rate under a tax treaty by non-resident shareholders in their return of income.

In cases where such a claim was denied by the Indian revenue authorities, it was becoming practically difficult for non-resident shareholders to claim the credit of incremental tax in their home country. With this amendment, these issues stand resolved and non-resident shareholders can with certainty consider the concessional tax rate of 10 percent (plus applicable surcharge and cess) under Indian law for the purpose of business planning.

How does the industry view the changes?

“The amendments made by the Finance Act, 2023 reaffirm the government’s commitment to facilitate aircraft leasing activities in India. These reforms are expected to facilitate relocation of offshore aircraft leasing enterprises to India, enhancing the attractiveness of IFSC for carrying out aircraft leasing activities in India,” Nishant Shah, Partner, Economic Laws Practice, says.

Industry entities say the capital gains exemption on sale of equity shares will help as the gains arising on sale of aircraft is not taxable in the hands of an IFSC unit.

“With this amendment, even the gains arising on sale of equity shares of an IFSC unit engaged in aircraft leasing will not be taxable subject to satisfaction of certain conditions. Hence, non-resident lessors will have flexibility in structuring their operations in IFSC since there will be no income tax on sale of aircraft and sale of equity shares of an IFSC unit,” said an individual involved in facilitating the setting up of leasing units in Gift City.

S. Vasudevan, Executive partner, Lakshmikumaran & Sridharan Attorneys, said the government has been introducing various amendments in tax and regulatory laws every year to give impetus to operations in IFSC.

In October 2020, the Finance Ministry had notified “aircraft lease” as a financial product that could be transacted in Gift City.

“This year’s budget is no exception. Some of the changes are specifically directed at attracting entities engaged in the business of aircraft leasing to set up units in IFSC,” Vasudevan says.

He adds that Budget 2023-24 provides income tax exemption on dividends received by any IFSC unit from another IFSC unit, subject to the condition that both are primarily engaged in the business of aircraft leasing.

Some others see benefits of the amendments on the regulatory side as well. According to Asish Philip, Partner, Lakshmikumaran & Sridharan Attorneys: “The Budget Speech gave a hope of streamlining the registration and operation mechanism in IFSC. The delegation of powers under the SEZ Act to IFSCA and setting up of single window for registration and approval from IFSCA, SEZ, SEBI, GST and other authorities is a step in the right direction.”

SEZ is short for Special Economic Zone, SEBI for Securities and Exchange Board of India and GST stands for Goods and Services Tax.

This will mean that the requirement of obtaining multiple registrations/dual control of units will be soon done away with and this will help in ease of doing business and setting up units in IFSC.

How much will the latest changes proposed in the Budget help bring down costs for airlines?

Industry players say that while it is difficult to quantify the savings, there is unanimity that these changes will make it easier for foreign players to come and set up aircraft leasing companies in Gift City.

“The latest changes are a game changer and an enabler,” said a person who advises foreign companies to set up leasing companies in Gift City.

At the moment, IFSC has about 19 aircraft leasing companies, which include engine leasing, ground support equipment and aircraft leasing companies. Till now, 11 aircraft have been leased through IFSC which include helicopters, corporate jets including one deal worth $ 65 million for a corporate jet and trainer aircraft. One ATR aircraft for the regional connectivity scheme has also been leased through IFSC.

People familiar with the mater indicate that Air India has already leased about five to seven engines from IFSC. It is estimated that an engine is also of high value, with each engine being valued at between $ 10 to $ 15 million. The engines for Air India have been leased through a US based, NASDAQ-listed company which is expected to lease around 35 to 40 engines to multiple airlines in the country in the next month-and-a-half, the people said. Thy Sources added that more engine leasing companies wee showing interest in setting up shop in ILFSC.

Discussions are also going on to allow leasing of simulators at competitive rates through ILFC so that Indian pilots do not need to go abroad for training. The move will help not only Indian pilot training institutes become more cost-efficient but also see the number of such institutions spike.