GIFT City's aircraft leasing business struggles amid confusing rules

Despite generous tax breaks, opaque and confusing rules have companies struggling to get off the ground

In a little over two years after the Union Budget made aircraft leasing from Guj­arat International Finance Tec-City (GIFT) eligible for massive tax breaks, the business seems to have barely taken off. In 2021, the first plane was leased by JetSetGo, one of the several aircraft leasing companies that set up shop at GIFT. 

No other aircraft, except a chopper, has been leased to date. Even the state-owned Pawan Hans, which leased six choppers from Lockheed Martin’s subsidiary Sikorsky at the recently concluded Wings India 2022 at Hyderabad, decided to do so from an Ireland-based aircraft leasing firm. Ironically, the budgetary measures to make GIFT a tax haven for aircraft leasing was done to minimise leasing from nations like Ireland that dominate this market globally. 

Even Jet Airways, which is looking to rebuild its fleet for its revival, has reportedly claimed that leasing planes from GIFT is proving to be more expensive than from offshore destinations.

Owners of leasing companies and leading legal experts who spoke to Business Standard expressed several apprehensions about how things are unfolding at GIFT. Primary among them was the lack of clarity among customs officials when a plane is imported by a GIFT-based entity, little interest from banks to provide financing to aircraft leasing firms and infrastructural bottlenecks at GIFT that make it easy for firms to set up shop but difficult to get their business up and running.

“The government has set the rules in place. But nobody on the ground has a clue about how to implement them. There is no standard operating procedure in place. Nations like Ireland have very clear rules regarding leasing and financing of planes,” said Kanika Tekriwal, CEO of JetSetGo. Tekriwal’s company was the first to lease a business jet from GIFT. The jet was leased to a related entity of JetSetGo and had customs officials scratching their heads over the rulebook.

Any GIFT-based entity can import pla­nes for customers in India only through the two designated special economic zone (SEZ) airports at Nagpur and Hyderabad. Customs officials, who are still trying to figure out the new rules, are often apprehens­ive about giving clearances soon. For ins­t­a­nce, customs officials at Hyderabad airport did not clear JetSetGo’s aircraft leased thro­ugh GIFT, which was then flown to Nagpur. After many days of protracted negotiations by the company’s legal and management team with customs officials, the plane was cleared. “From the customer’s perspective, the delay is a substantial loss financially. For the leasing company, the procedural delay is a matter of loss of trust from pro­s­p­ective customers,” Tekriwal pointed out.

According to government rules, an aircraft leasing company at GIFT is exempt from basic customs duty while importing an aircraft or its parts from abroad. Another rule states, however, that the customs duty exemption is available only if the imported aircraft is supplied to an Indian scheduled airline operator. Although these rules were notified in 2020, aircraft leasing companies said officials on the ground are still trying to comprehend them, leading to many pros­pective customers avoiding GIFT and scouting for planes abroad.

In October 2020, the central government had designated aircraft leasing as a financial product under the International Financial Services Centres Authority (IFSCA) Act. In effect, any company doing aircraft leasing business out of GIFT city in Gujarat was eligible for a plethora of tax incentives. Apart from goods and services tax (GST) and customs duty exemptions, aircraft leasing firms would be eligible for a 10-year tax holiday like other companies at GIFT. The minimum alternate tax (MAT) rate was slashed to nine per cent from 15 per cent.

At present, around a dozen airline leasing companies (including one owned by a leading Indian airline) have started operations from GIFT. But for an industry that requires huge capital expenditure outlays, banks have yet to start evincing interest in providing financing. In nations like Ireland, the cash-rich leasing companies often double up as financiers for airlines. In India, the contours of aircraft leasing finance are yet to take shape. This has meant that des­pite massive tax breaks at GIFT, leasing aircraft has still not become lucrative enough for potential lessees.

The CEO of a leasing company at GIFT said that leasing planes from Ireland or San Marino was still 20 per cent cheaper than doing so from GIFT. The official explained, “Banks and other financial institutions are yet to show any interest in financing aircraft leasing because of the uncertain regulatory structure at GIFT. There is little interest from foreign investors. Rules keep changing every day at GIFT. There is still a lack of cl­a­rity on how the tax benefits at GIFT would play out for related-party transact­i­ons. If a domestic airline sets up its own lea­sing company at GIFT and then imports a plane, would that be considered a commercial transaction for availing of tax benefits?”

The “sale and lease back” model adopted globally heavily relies on institutional financing. Airlines buy planes in bulk at deep discounts from aircraft manufacturers, sell them to a leasing company and then lease them back from the company. Many of these deals are financed by leasing companies at lucrative rates. It is estimated that Ireland’s 50-odd leasing companies control 60 per cent of the aircraft leasing and financing business.

Although no big aircraft has been leased from GIFT, the regulatory issues could be teething troubles that could be clarified soon. “Rome wasn’t built in a day,” said Ketaki Me­hta, partner at Cyril Amarchand Mangaldas’ GIFT City office.

Mehta pointed out that the aircraft leasing business has been nurtured by the government in Ireland for 50 years. Banks are re­se­a­rching the financing model and there is in­terest from Indian airlines. “The government has put everything in place. GIFT is still evolving and it shouldn’t be long before the first big bird is leased from Indian shores,” she said.