Aircraft Leasing: How Indian Co’s Benefit from International Financial Services Centre (IFSC)

India’s aviation sector is in the booming phase. As the third-largest domestic aviation market globally, only after United States and China, India presents a significant opportunity for aircraft leasing companies. The International Financial Services Centre (IFSC) in GIFT City, Gujarat, offers a unique and attractive platform for Indian companies to capitalize on this growth. This article will explore how Indian businesses leverage the IFSC’s unique regulatory environment and tax incentives to benefit substantially from the burgeoning aircraft leasing market.

The Booming Indian Aviation Market: A Landscape of Opportunity

India’s aviation sector’s rapid expansion is driven by a combination of factors: a growing middle class, increasing disposable incomes, improving infrastructure, and government initiatives promoting air connectivity across the country. The International Air Transport Association (IATA) forecasts substantial growth in passenger and cargo traffic in the coming years. This robust growth translates into a significant increase in demand for aircraft, making aircraft leasing a highly attractive investment opportunity.

Indian Aviation Industry Highlights

The IFSC Advantage: A Tailored Regulatory Environment

The IFSC in GIFT City was established to provide a globally competitive financial ecosystem, catering to both domestic and international players. For aircraft leasing, the IFSC offers a distinct advantage with its carefully designed regulatory framework, administered by the International Financial Services Centres Authority (IFSCA). This framework is characterized by:

• Light-Touch Regulation:
• The IFSCA adopts a light-touch regulatory approach, aiming for efficiency and ease of doing business while maintaining robust oversight. This contrasts with the often more stringent regulations in other jurisdictions, making the IFSC an attractive destination for aircraft lessors.
• Comprehensive and Consistent Framework: The regulatory environment is designed to provide clarity and consistency, reducing uncertainties for businesses and promoting investor confidence.
• Global Best Practices: The IFSC’s regulatory framework aligns with global best practices, making it easier for international aircraft leasing companies to operate in India.

Tax Benefits: A Key Incentive for Aircraft Leasing in the IFSC

The IFSC offers an extremely attractive tax regime designed to stimulate investment and growth in the aircraft leasing sector. This includes:

• 100% Corporate Tax Exemption: Aircraft leasing companies can benefit from a 100% corporate tax exemption for up to 10 out of 15 consecutive years. This provides a substantial financial incentive, making the IFSC a highly competitive location compared to other jurisdictions.
• Zero Capital Gains Tax and Stamp Duty: The absence of capital gains tax on the disposal of aircraft and the waiver of stamp duty on acquisition represent significant cost savings for leasing companies.
• No Withholding Tax on Lease Payments and Interest: This provision further reduces the tax burden and simplifies the financial management of aircraft leasing operations.
• Minimum Alternate Tax (MAT): While a MAT provision exists, concessional rates apply, and with the new tax regime introduced in April 2020, the MAT is effectively inapplicable for many.

These tax incentives, when combined, significantly improve the profitability and attractiveness of aircraft leasing within the IFSC and could encourage Indian Companies to dive into the Aircraft Leasing, that they been shying away all this while.

Aircraft Leasing – Why Indian Companies Shy Away From Being The ‘Lessors’?

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Benefits Beyond Tax: Access to a Vibrant Ecosystem

The IFSC offers more than just favorable tax policies. It provides access to a thriving financial ecosystem, including:

• Global Banks and Financial Institutions: The presence of numerous global banks and other major financial players within the IFSC simplifies transactions and facilitates access to capital.
• Professional Service Providers: A comprehensive range of professional services, including legal, accounting, and auditing firms, supports businesses efficiently.
• Global Talent Pool: The IFSC attracts a diverse and skilled workforce, ensuring access to the talent needed to manage complex aircraft leasing operations.
• Extensive Double Taxation Avoidance Agreements (DTAAs): India’s extensive network of DTAAs provides further tax efficiency for international transactions.

Setting Up an Aircraft Leasing Entity in the IFSC: A Straightforward Process

Setting up an aircraft leasing entity in the IFSC is a relatively straightforward process. It involves submitting an application to the IFSCA for registration and, in most cases, approval for entry into the Special Economic Zone (SEZ). Upon approval, the entity can begin operations. The entire procedure is designed to be efficient and transparent, making it easier for businesses to establish a presence in the IFSC quickly.

Salient features for Aircraft Leasing Framework

Eligibility:

To become a Lessor for undertaking permissible activities in IFSCs, the applicant must meet the eligibility criteria outlined in the Finance Company Regulations. This includes setting up operations in IFSC in the form of a Company, LLP, Trust, or any other form specified by the IFSCA.

Permissible Activity:

Operating/Finance lease for an aircraft or an aircraft ground support equipment including the sale and lease back, purchase, novation, transfer, assignment and any such other similar transactions in relation to aircraft lease; Asset management support services for assets owned or leased out by the Lessor or by its wholly owned subsidiary in IFSC and any other related activity with the prior approval of IFSCA.

Capital Requirement:

Aircraft lessors in IFSC are required to maintain minimum own funds at all times. The minimum owned fund requirement for entities undertaking operating lease and for those undertaking financial lease or hybrid of operating and financial lease are USD 0.2 million and USD 3 million respectively.

Prudential regulations:

FCs intending to undertake finance lease in IFSCs must comply with prudential norms such as capital ratio, exposure ceiling, and liquidity coverage ratio. However, entities intending to undertake operating lease are exempt from these norms, provided they have a Board approved prudential policy and meet the fit and proper requirement set out by the Authority. All entities, regardless of the type of lease, must comply with KYC, AML, and corporate governance requirements as set out in the FC Regulations.

Setting Up At A Glance

Registrations Status – Leasing Entities with IFSCA

The first Aircraft leasing entity was registered with IFSCA on May 06, 2021, and the first aircraft was leased by an IFSC entity to a lessee in India on August 19, 2021, marking the beginning of onshoring the offshore aircraft leasing services through GIFT IFSC.

As on March 31, 2023, there are 15 lessors registered with the Authority. Further, four lessors have been granted in‐principle approval and one application is under process. As on March 31, 2023, the lessors based at GIFT IFSC have leased 26 aviation assets including aircraft, engines, etc.

The last Annual Report 2022-23 was released in Aug 2023. Going by the trend, the Annual Report 2023-24 is expected anytime from IFSCA.

Challenges and Considerations

While the IFSC offers immense opportunities, businesses should be aware of potential challenges. These may include navigating the regulatory landscape and ensuring compliance with all applicable laws and regulations, managing foreign currency transactions effectively, and carefully understanding all aspects of the tax regime before committing. Thorough due diligence and expert advice are essential for mitigating potential risks.

Conclusion:

To conclude we can say that the IFSC in GIFT City presents a compelling opportunity for Indian companies seeking to benefit from the rapid growth of the aviation sector through aircraft leasing. The combination of a favorable regulatory environment, significant tax incentives, and access to a vibrant financial ecosystem makes the IFSC an attractive destination for establishing and expanding aircraft leasing businesses. By understanding the opportunities and mitigating the potential challenges, Indian companies can leverage this platform to unlock significant growth and contribute to the further development of India’s aviation industry. Prospective investors and businesses are strongly advised to seek professional advice before making any decisions regarding investment in this domain.