The government will need to amend regulations, waive duties and alter double tax avoidance treaties with other countries to make aircraft leasing business in India a reality, aviation sector experts have said.
In her maiden Budget on Friday, Finance Minister Nirmala Sitharaman said the government will create a regulatory framework to make India a hub for aircraft leasing and maintenance units for planes.
At present, Ireland serves as a base for top aircraft lessors because of its favourable tax laws. Last year, the Civil Aviation Ministry set up a working group to formulate policies to encourage domestic aircraft leasing industry. The group proposed amendments in rules and tax breaks to enable banks and insurance firms set up leasing business in International Financial Services Centre (IFSC) in Gujarat.
“A lot more would need to be done on double tax avoidance agreements. In the absence of such treaties, an overseas lessee would owe withholding tax when it pays an Indian lessor. The other key issues are keeping corporate tax low,” said a senior executive of a leasing company.
“The primary aim of government is to support leasing and financing requirements of domestic airlines. In order to encourage cross border leases it would need to amend tax treaties to ensure aircraft lease rent is not taxed in a lessee's country,” said Gautam Nayak, partner, CNK and Associates.
Leasing firms and lawyers say easier norms for aircraft repossession too are crucial. At present, a draft bill has been moved to give primacy to aircraft repossession rules over all other existing laws.
Currently, a combined fleet size of Indian airlines is over 600 and over 700 planes are on order. A report by leasing firm Avolon last May revealed around 76 per cent of the aircraft flown in India are on operating lease, which is the highest in the world.
On Friday, Sitharaman also announced tax incentives for companies setting up in IFSC, including tax deduction in any 10-year block within 15-year period. “This will incentivise leasing companies to set up operations here,” said Dipesh Shah, head of IFSC, Gift City.
“The government’s proposal to introduce aircraft financing and leasing will hopefully bring down the costs for carriers. Also, the announcement of identifying and developing 17 iconic tourism sites will boost domestic air travel demand,” said Sunil Bhaskaran, CEO, AirAsia India.
“One must applaud the very ambitious initiative and capable persons spearheading it. However, such a goal would be impossible to achieve without amendment of several laws and regulations and ensuring the financing is cheaper than that is available now. Also, the industry, being completely denominated by the US dollar, will need to be convinced about why it should make a big shift to India. It is a herculean task but certainly possible,” said Nitin Sarin, an advocate who specialises in aviation law.