Regulatory Framework and Opportunities for Aircraft Leasing in IFSC/GIFT City (India)
Prateek Goyal and Vistasp Irani of the law firm MVKini give an informative overview of aircraft leasing in IFSC GIFT City, India, looking at the various benefits (including tax-related) and procedures for entities operating under this framework.
Prateek Goyal
Vistasp Irani
A Comprehensive Analysis
GIFT City, situated in Gandhinagar district in Gujarat, India, is a meticulously planned business district designed to encourage global financial services. Spanning 886 acres, it includes India’s first International Financial Services Centre (IFSC). With the burgeoning aviation sector in India, the aircraft leasing industry is poised for substantial growth in the next three years. To promote aircraft leasing activities within IFSC GIFT City, the IFSC Authority (IFSCA) has introduced specific regulations. These regulations offer a plethora of opportunities for aircraft lessors, as follows.
- Tax benefits: IFSC GIFT City provides substantial tax benefits, including exemptions from certain direct and indirect taxes. These incentives result in reduced tax liabilities and streamlined tax compliance, making it an attractive destination for aircraft lessors.
- Access to global markets: GIFT City offers a gateway for aircraft lessors to access global markets and offer their services internationally without the regulatory complexities often encountered in the domestic market.
- Foreign exchange transactions: as an IFSC, GIFT City permits the free convertibility of foreign currencies for various financial transactions. This enables aircraft lessors to engage in cross-border aircraft-leasing activities with ease.
- Regulatory ease: the regulatory framework in IFSC GIFT City is designed to be more flexible and efficient compared to the domestic regulatory environment, expediting the setup process and streamlining operations for aircraft lessors.
- Access to financial services: GIFT City is home to various financial institutions, banks and insurance companies, providing aircraft lessors with access to a wide range of financial services that support their leasing activities.
- Aircraft financing hub: GIFT City is positioned to become a hub for aircraft financing and leasing, attracting both domestic and international investors looking to invest in the aviation sector.
- Infrastructure and support services: the IFSC offers modern infrastructure, connectivity and support services, enhancing the efficiency and effectiveness of aircraft leasing operations.
- Legal and jurisdictional clarity: GIFT City provides a clear legal and jurisdictional framework, ensuring smooth dispute resolution and legal certainty for aircraft lessors and lessees. The IFSCA acts as the unified regulator overseeing all financial and non-financial entities operating in the IFSC.
- Networking opportunities: being part of an established financial services centre like GIFT City offers aircraft lessors networking opportunities with other financial players, potential lessees and aviation industry stakeholders.
- Innovation and technology: GIFT City encourages innovation and technology adoption in financial services, allowing aircraft lessors to leverage digital solutions to streamline operations and enhance customer experience.
“GIFT City’s IFSC offers a comprehensive and attractive environment for aircraft leasing, with a range of […] benefits…”
Applicable Laws and Authorities
The regulatory framework in GIFT City for aircraft leasing involves:
- exchange control regulations;
- IFSC guidelines; and
- the country’s tax laws.
Under the IFSC Authority Act, 2019, the IFSCA serves as the unified regulatory authority responsible for overseeing and regulating activities within GIFT City. Other regulators, known as “Appropriate Regulators” under the IFSC Act, include RBI, SEBI, IRDAI and PFRDAI.
Tax Structure
Direct taxes
IFSC units, including aircraft leasing and financing units, can avail of a 100% deduction from income for any ten consecutive assessment years within their first 15 years of operation, providing significant flexibility.
Corporate tax rate reduction for domestic companies
Domestic companies opting for the new tax regime can enjoy a reduced corporate tax rate of 22%, further enhancing the attractiveness of IFSC GIFT City for aircraft leasing.
Minimum alternate tax (MAT) and alternate minimum tax (AMT)
MAT is imposed on book profits when the tax on taxable profits computes below a threshold. Even if such companies claim 100% deduction, they must pay this MAT. For IFSC units with income solely in foreign currency, the MAT rate is 9%, offering significant savings compared to other domestic companies (18.5%).
Depreciation benefit for aircraft and aircraft engines
Aircraft and aircraft engines used in the IFSC can claim depreciation at a rate of 40%, which supports aircraft leasing operations.
Tax exemption for foreign lessors
Non-resident lessors enjoy tax exemption on royalty or interest income from leasing aircraft to the IFSC’s aircraft leasing unit, given unit commencement by 31 March 2024. This benefits Indian airlines, exempting them from withholding tax on leased plane payments through the IFSC, making it an attractive option.
Exemption for dividends
Dividends from one IFSC unit to another, primarily engaged in aircraft leasing, are tax-exempt, requiring no tax to be deducted at source (TDS).
Indirect taxes
Certain specific services within the IFSC are exempt from goods and services tax (GST). Aircraft leases in India are now subject to a “nil” GST rate on imported aircraft under lease arrangements. Aircraft leasing and financing units in the IFSC are exempt from basic customs duty (BCD) and integrated GST (IGST) on aircraft leases, reducing operational costs.
Stamp duty and other benefits
The IFSC unit involved in aircraft leasing enjoys a ten-year stamp duty waiver on setting up and property acquisition, excluding aircraft sales. Additionally, eligible entities receive full reimbursement of electricity duty and an Re.1/unit subsidy on power tariffs for five years, aimed at reducing electricity expenses and supporting businesses as per government guidelines.
Procedure for Aircraft Leasing
The following two types of aircraft leasing are permitted in the IFSC:
- financial lease – this is a long-term lease agreement in which the lessor transfers ownership of the aircraft to the lessee at the end of the lease term; and
- operating lease – this is a short-term lease agreement in which the lessor retains ownership of the aircraft throughout the lease term.
According to the Finance Company Regulations for IFSCs, an operating lease for aircraft leasing is considered a “permitted non-core activity”, while a financial lease for aircraft leasing is classified as a “permitted core activity”. This includes a combination of financial and operating lease transactions for aircraft leasing.
IFSCAs can create regulations for companies to register as either a “finance company” or a “finance unit” specifically for managing aircraft lease transactions. This is enabled by Section 12 of the IFSCA Act, aiming to promote the establishment of aircraft leasing businesses in IFSCs.
General Conditions Under the Framework
Entities must maintain the necessary financial records, comply with statutory obligations, and allocate resources as required. The IFSCA has the authority to specify norms and procedures to facilitate and regulate permissible activities.
In summary, GIFT City’s IFSC offers a comprehensive and attractive environment for aircraft leasing, with a range of tax benefits, access to global markets, regulatory ease and a supportive eco-system. This initiative aligns with India’s vision to become a global aviation hub and to promote investment in the aviation sector, making it an exciting opportunity for aircraft lessors looking to expand their operations in India.
