Despite India being the third[1] largest domestic aviation market in the world, a majority of the aircrafts in the country (more than 70% approximately) are procured through lease arrangements, with most of them being provided by overseas lessors. Airline companies do not have the financial wherewithal to purchase aircrafts and hence, are forced to take them on lease. However, since the aircraft financing industry is at a nascent stage in India and considering the risks involved, new players are unwilling to enter the business. While leasing aircrafts helps to manage the liquidity position of aircraft operating companies, it comes at a heavy cost and significant financial risks for aircraft operating companies and creates huge trade imbalance for the country.
Reasons and drawbacks of leasing aircrafts from outside India:-
However, if the domestic aircraft leasing finance industry is well developed and the issues pertaining to aircraft leases are captured adequately, it will enable the industry to leapfrog and compete with leading global aircraft leasing finance companies. This will reduce costs because the cost of operations in India is lower compared to developed economies. Also, since all payments would be within India, the profits generated in India will remain in India. This will not only improve our balance of payments position significantly, individual aircraft operating companies may also not have to worry about foreign exchange fluctuations. In the long run, it would also help India in becoming self-reliant. However, it is also important to realise that the industry requires certain incentives to enable it to set up base in the country and help India achieve the lofty goal of becoming one of the aircraft leasing finance hubs in the world.
The Indian government has realised this and is trying to promote the International Financial Service Centre (“IFSC”) as the launch pad for aircraft leasing activity in India.
Towards this, the Indian government has attempted to provide a highly beneficial tax regime, along-with a host of tax incentives to any new aircraft leasing units proposed to be setup in the IFSC. Through a recent change, dividend income derived by an aircraft leasing unit setup in the IFSC from another such aircraft leasing unit will now be exempt.
Pursuant to the above exemption, the Central Board of Direct Taxes (“CBDT”) has recently vide a Notification dated July 20, 2023[2] (“Notification”), provided relief from withholding of tax (“TDS”) in such cases and laid down the procedure to be followed for payment of such dividend without withholding any TDS. The Notification requires that a statement-cum-declaration[3] be furnished by the payee to the payer, wherein it will certify that it continues to be a unit working in the IFSC, primarily engaged in aircraft leasing activity. The said Notification shall come into effect from September 1, 2023.
With these amendments and exemptions, the government has tried to ease the tax and compliance burden in the hands of aircraft leasing units in the IFSC, preventing unnecessary blockage of funds in the form of withholding tax.
Need for multiple SPVs
One or more special purpose vehicles (“SPVs”) may be involved in aircraft leasing business. For aircraft leases, separate SPVs are setup for each aircraft lease to smoothly carry out the aircraft leasing activity. Certain aircraft leasing finance companies may prefer to operate through multiple SPVs to avoid adverse repercussions on any one of the aircrafts financed by them under any other laws such as the bankruptcy law, etc.
Exempting withholding of taxes on such dividend
It may be appreciated that exempting tax deduction at source where an income source is already exempt helps to make an exemption truly effective as it would remove the requirement of claiming a refund later by the lessor and help to avoid blockage of valuable funds of the lessor.
Other tax incentives
As per the Finance Act 2023, capital gains arising in the hands of a non-resident or an aircraft leasing unit in the IFSC from transfer of equity shares of a domestic company being an aircraft leasing unit in the IFSC for a period of ten years, is also exempt, provided that the latter commences operations on or before March 31, 2026. This would help in planning exit from a domestic company engaged in aircraft leasing due to the reduced/ nil tax burden, and making the structuring of aircraft leasing activities in India smoother and efficient in the initial phases of development of aircraft leasing activity itself.
It may be noted that the above tax incentives are in addition to the income tax incentives already made available for an aircraft leasing unit in the IFSC, such as:
Conclusion
Owing to the government’s continued efforts through various policies and tax measures, several aviation industry players, including foreign aircraft lessors, have shown interest in setting up shop in IFSC, while a few others like Acumen Aviation, Alvest Millennium Aviation, etc., have already setup bases there. While the aircraft leasing business is at its nascent stages in India, the government is conscientiously and consistently taking proactive measures to bring the country at par with major global aviation finance hubs such as Ireland, Netherlands, etc.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] https://www.ibef.org/industry/indian-av
[2] Notification No. 52/2023/F. No. 275/17/2023-IT(B)] dated July 20, 2023
[3] in Form No. 1 as annexed with the Notification
