GIFT City tax regime for aircraft leasing needs a second look

The overall success of GIFT City hinges on the competitiveness of its tax regime.

In the Interim Budget 2024, the Finance Minister proposed to allow the aircraft leasing community additional time till 31 March 2025, to commence leasing operations in GIFT City, to be eligible to avail certain key tax incentives. The extension will benefit non-resident aircraft lessors as well as the GIFT City leasing units. To be clear, non-resident aircraft lessors will not be taxable in respect of lease rental and interest income received from an aircraft leasing unit in GIFT City that has typically commenced operations till 31 March 2025. Similarly, the corporate tax holiday for aircraft leasing units in GIFT City will extend to income on disposal of aircraft, provided the unit has commenced operations till 31 March 2025.

As already indicated by the Finance Minister prior to the Budget speech, the Interim Budget 2024 did not contain any significant tax proposals. A full fledged Union Budget 2024 will be presented by the newly elected government after the General Elections scheduled around mid-2024. Union Budget 2024 will be a good opportunity to fine tune the GIFT City tax regime, keeping in mind the unique requirements and challenges faced by the aviation industry.

Non-resident aircraft lessors planning to operate from GIFT City for the long-term, may find the sunset date extension inadequate. It is standard business practice among aircraft lessors to set up multiple special purpose vehicles (SPVs) for owning and leasing an aircraft. A non-resident aircraft lessor who has commenced operations in GIFT City before March 31, 2025, may face an unintended scenario – key tax incentives may not be available for such SPVs set up after March 31, 2025, as the condition for commencing operations is qua the SPV / GIFT City unit and not qua the business group.

One way to resolve the issue is to provide specific tax incentives to an aircraft leasing business group that has commenced operations in GIFT City before March 31, 2025, so that SPVs set up by the group after the cut-off, can also avail of the tax incentives. Interestingly, the International Financial Services Centres Authority (IFSCA) has taken cognizance of the standard business practice for aircraft leasing and has allowed sharing of resources, including employees and office space, across multiple SPVs in GIFT City. Taking a cue from how IFSCA has dealt with the issue, the tax regime may also be suitably modified.

On a related note, there is some uncertainty regarding transition of existing leases to GIFT City. In the absence of specific guidance, aircraft lessors (particularly non-residents) may have to evaluate whether GIFT City operations should only constitute of new lease contracts, or whether transitioning of existing leases to GIFT City may also be an acceptable proposition for Indian tax authorities.

Another issue is the tenure of the corporate tax holiday. An aircraft leasing unit in GIFT City is eligible for a tax holiday for a consecutive 10-year period out of an initial block of 15 years, which may seem insufficient when compared to the useful life of the aircraft i.e., 20-25 years. Serious thought is needed for determining the ideal tenure of the tax holiday, so as to make the GIFT City an attractive destination for aircraft leasing, compared to other well-established international aircraft leasing hubs.

Broadly speaking, from the perspective of a non-resident lessor, lease rental and interest income on lease of aircraft to an aircraft leasing unit in GIFT City (which has commenced operations before the sunset date) is exempt from tax in India. Likewise, introducing a tax exemption for dividend income of a non-resident shareholder from an aircraft leasing unit in GIFT City may be a welcome move – currently, the exemption for dividend income only applies to a payment made by a GIFT City unit to another GIFT City unit, provided both units are engaged in the business of aircraft leasing.

The overall success of GIFT City hinges on the competitiveness of its tax regime. Over the past few years, the government has been systematic in its efforts to develop a robust tax and regulatory framework for promoting the aircraft leasing business in GIFT City. There is a high expectation that the beneficial tax regime for aircraft lessors will continue to move in the right direction, regardless of the outcome of the upcoming General Elections.