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India's finance minister in her budget speech proposed a tax holiday for aircraft-leasing companies and tax exemptions for airlines paying lease rentals to foreign lessors if they choose to be based in the country's upcoming international finance hub.
India’s civil aviation hasn’t had a good run for a couple of years. Despite being the world’s third largest and fastest growing civil aviation market in the world, Indian aviation companies have been battling to get off the ground, with many facing huge financial losses and high fuel costs.
It began with Air India’s, the country’s national carrier airline long struggle with losses. The first shockwave, however, was felt in 2019 when Jet Airways, India’s second largest airline went under $ 4 billion in debt and having to halt operations temporarily in Apri. It was finally bought over by Etihad Airways. Then came Covid and wide-spread lockdowns, making the sector’s struggle became a lot harder.
In September last year, Civil Aviation Minister Hardeep Singh Puri told the media that ‘airlines in India were seeking at least $1.5 billion as an interest-free credit line from the government as lockdowns and restrictions linked to the coronavirus pandemic hit demand for air travel.’
The International Civil Aviation Organization (ICAO) projected a whopping 27% dip in passenger capacity for India last year. "On March 5th, we estimated that industry revenues could take a hit of up to $113 billion as a result of what we thought then would be a worst-case scenario. We could not have foreseen the developments of the last days with massive restrictions on travel being put in place and with no clear understanding how long they will remain in effect," said IATA CEO Alexandre de Juniac in a statement on March 17.
The Indian aviation sector contributes a reported $72 billion to the national GDP and the government has been engaged with aircraft lessors and financiers to ensure there is no premature withdrawal of planes to stop further impact on the sector. In 2019, a plan to set up a local aircraft leasing industry was first announced in but progress has been slow.
Cut to February 2021 and the budget announcement and some respite seems to be on the horizon.
India's finance minister, Nirmala Sitharaman, in her budget speech proposed a tax holiday for aircraft-leasing companies and tax exemptions for airlines paying lease rentals to foreign lessors if they choose to be based in the country's upcoming international finance hub.
India is developing an offshore finance hub called Gujarat International Finance Tec-City, or GIFT City to attract foreign investors with close to zero tax, and top-notch infrastructure in an effort to compete with Hong Kong and Singapore.
"This should encourage leasing companies to set up shop, but this lackadaisical attitude of not even notifying regulations for two years should give way to a more proactive approach to make GIFT City and the aircraft-leasing business competitive," Sachit Jolly, partner at Indian law firm DMD Advocates
India's air travel market is dominated by budget airlines like Interglobe Aviation's IndiGo and SpiceJet Ltd that have hundreds of new planes on order from Airbus and Boeing.
The planes are typically bought on sale and leaseback arrangements with lessors that are based in tax-efficient jurisdictions like Ireland, which exposes domestic airlines to foreign currency fluctuations. China is also a major player in the multi-billion dollar aircraft leasing industry.
Overall, this is a good move but it may not result in well- established lessors coming into India overnight, said Nitin Sarin, managing partner at law firm Sarin & Co, adding it will benefit newer and smaller lessors like helicopter fleet owners and turbo prop lessors.
- Inputs from Reuters