Gift City: a boon to Indian aircraft leasing ecosystem

Monday 13 June 2022

Ajay Kumar

KLA Legal, Gurgaon

ajay.kumar@kla-legal.com​​​​​​​

Anchal Nanda

KLA Legal, Gurgaon

anchal.nanda@kla-legal.com

Travel by air is the safest and fastest mode of transport in the world and has seen tremendous growth over the years. The global aircraft leasing market is estimated to reach US$247bn by 2026.[1] With US$180bn required for funding to meet the rising aircraft demand, the necessity of entering into a lease is borne by the need to acquire an aircraft without increasing debt obligations.

The Indian leasing market is expected to grow to 4.8 times of its 2018 value by 2026, thus making India the third largest aviation market in the world.[2] Owing to factors such as financial fragility, operational incentives, price sensitivity of consumers and infrastructure, about 80 per cent of the total commercial fleet in India is leased, compared with 53 per cent globally.

One might ask why it is that despite such incentives being available in India itself, airlines look for lessors abroad? The answer being dearth of aircraft leasing companies in the country. Local presence of lessors would not only help the lessees in creating better opportunities with favourable terms and conditions but also give a major impetus to the Indian economy as a whole, while leading to increased GDP, better infrastructure, retention of financial business and services.

With the aim of developing a robust and indigenous leasing and financing structure, the Ministry of Civil Aviation, Government of India constituted a Working Group on Development of Avenues for Aircraft Financing and Leasing Activities namely ‘Project Rupee Raftar’, comprising of number of stakeholders, regulatory bodies, academicians, lawyers[3] and various financial institutions to discuss policy and implementation issues. In order to unlock the unbridled potential of India in the leasing, on 20 December 2019, the International Financial Services Centre Authority Act (IFSCA) was enacted by the Parliament to establish an IFSC Authority. As a result, Gujarat International Finance Tec-City (GIFT City) was born.

On 16 October 2020, the Central Government notified the following as financial products under the IFSCA Act 2019[4]: aircraft leases (including operating and financial leases); any hybrid of operating and financial leases of aircraft or helicopters; and engines of aircraft or helicopters, or any other part thereof. This move created an opportunity for the establishment of a viable aircraft leasing market in India, particularly in the GIFT City. Under the framework, leasing in GIFT City includes an operating lease, sale leaseback, novation, purchase, transfer, assignment and any other related activity.[5]

Located in a special economic zone in Gujarat, GIFT City is said to be the country’s first operational greenfield smart city equipped with high end infrastructure to enable business and commerce. An aircraft leasing company/lessor can consider establishing themselves either as an LLP or a trust with a minimum capital of US$200,000 (or equivalent) and can deal in freely convertible currency and can maintain a Rupee account to defray administrative expenses.

Besides the above regulatory regime, what makes GIFT City a differentiator from other foreign leasing jurisdictions are the tax incentives and competent options that it has to offer. In February 2021, with an aim to boost the confidence of lessors to establishing their units in IFSC. The government, through its Union Budget 2021-22, announced various tax breaks such as: tax holiday for lessors and exemption from payment of withholding tax concessional corporate tax rates.

Following the budgetary announcements, the IFSC authorities offer a competent taxation regime. Some are the major tax incentives are as below:

  • Tax holiday for any ten consecutive years out of 15 years;
  • Nil withholding tax (WHT) on interest payment paid to non-residents by units in the IFSC;
  • No WHT on aircraft lease payment, in the nature of royalties or interest, paid to non-residents by units in the IFSC, since such payments are exempt from tax for non-residents. This benefit is also subject to the condition of commencement of operations by 31 March 2024;
  • Stamp duty exemption on activities relating to setting up of entity in GIFT;
  • Five per cent GST on lease rentals paid by Indian Airlines;
  • Two per cent WHT applicable on lease rentals paid to IFSC units; and
  • No custom duty on import of any other items by IFSC entity; and
  • Interest expense on aircraft loan/intercompany funding deductible at arm’s length payments.

Besides the above, GIFT offers a financially viable ecosystem with concentration of financial agencies, including public and private sector banks, asset management companies and service providers. These make GIFT an ideal leasing and financing platform for the domestic aviation market. With these key aids, aircraft leasing business seems to have reinvigorated quite well in GIFT City. Last year, JetSetGo became the first aircraft operator to directly import an aircraft through GIFT IFSC. Vman Aviation Service[6] also leased a helicopter through GIFT. Several other players such as Acumen Aviation, Millennium Aviation and Rensar Aviation have also set up their shops in GIFT City, while many others are in the pipeline for approval of licenses for conducting aircraft leasing activities.

Though GIFT IFSC is progressing as an alternate to other jurisdictions in aircraft leasing, there are some significant hurdles and wrinkles that need to be ironed out and addressed by the government. As an industry that heavily relies on capital expenditure, funding from banks plays a pivotal role in leasing and financing. Though many banks have their presence in GIFT IFSC, they are hesitant in financing aircraft due to the unclear regulatory regime and their recovery from the Covid-19 pandemic.

Logistical issues, such as absence of an airport is a major challenge to aircraft lessors since a newly leased aircraft needs to be parked at a proper location. Under the present tax regime, an aircraft lessor at GIFT is exempt from payment of custom duty. However, dubiousness among custom officials regarding comprehending these rules can be seen, which may result in procedural delays.

In order to gain confidence of foreign lessors and to enable them to do business at IFSC, an inclusive set of rules regarding repossession mechanisms, laying down the recourse available to IFSC lessors and lenders needs to be enacted by regulatory authorities in an event where the lessee defaults and goes under insolvency. Substantial issues, such as jurisdiction and governing law in leases that are routed through GIFT IFSC need to be looked into. More importantly, since aircraft leasing involves the role of multiple regulators at each stage, what is needed is coordination and collaboration among regulatory bodies, such as the Ministry of Civil Aviation, Directorate General of Civil Aviation, Airports Authority of India, Ministry of Finance and the IFSCA to upsurge confidence of foreign lessors and also reduce procedural delays.

With the domestic aviation market recovering from the pandemic and commercial aviation burgeoning, it is imperative that the government addresses the bottlenecks so as to bring GIFT City on par with foreign jurisdictions. This is in terms of leasing and making the ecosystem more viable in order to facilitate ease of doing business for entities. Though GIFT is still evolving with each passing day, the government’s grandiose plan to make GIFT City a boon to the aviation leasing ecosystem in India may soon be a reality.

 

[2] Airbus Global Market Forecast 2019-2038, IATA.

[3] Ajay Kumar was a part of this panel.

[4] Circular F. No. 28/IFSCA/ALF/2020-21 dated 19 February 2021.

[5] Ibid.

[6] The authors assisted Vman on the transaction.

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