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GIFT City can launch aircraft leasing

The working group has recommended low corporate tax rate on leasing companies, provision for accelerated depreciation on aircraft, and a supportive skills development system

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A working group tasked with planning a roadmap for developing aircraft leasing and financing industry in India has suggested that the country's sole international financial services centre of GIFT City in Gujarat should be used for launching this industry in the country. Globally, the aircraft leasing and financing businesses are operated from the international financial services centre (IFSC) and GIFT City provides the off-shore status for financial services to residents and non-residents under the current regulations by offering important income tax incentives, company law exemptions and dispute resolution mechanism, among other benefits.

Most importantly, the off-shore status of IFSC with the same ecosystem as other offshore locations but which is physically present on Indian soil, would be relevant and apply to transactions entered into with Indian entities by airlines across the world, the suggestions submitted to the government notes. However, some changes to the provisions have also been suggested by the working group after identifying, and where possible quantifying, the inefficiencies in the existing ecosystem in India, and notably in the IFSC, vis-à-vis the regulatory regimes of the leading global aircraft financing hubs such as in Dublin (Ireland), Singapore, and Hong Kong and Tianjin (China), the civil aviation ministry officials said.

According to analysts, though India is set to become the third-largest aviation market in the world by 2022, it practically has nil aircraft leasing/finance industry at present. This is despite the fact that Indian airlines have placed orders in excess of 1,000 aircraft, making it the third largest order book in the world behind the US and China. Further, around 30 years from now, India's commercial airline fleet is expected to cross 5,000 aircraft requiring massive aviation eco-system, including maintenance, crews, lessors, etc, which is prompting the government to think on those lines, the ministry sources reveal. Further, more than 70% of the aircraft acquisitions over the last decade have been on an operating lease basis and the trend is expected to continue.

For example, total lease rental payment by Indigo in FY18 was around Rs 3,600 crore and is expected to rise to almost Rs 7,500 crore in 2020-21. This shows that aircraft leasing is a huge industry and domestic carriers are incurring large dollar-denominated expenses. As a result, any depreciation of the rupee against the dollar will amount to a large drop in net profit for Indian carriers.

"It was observed that aircraft financing is the most profitable segment of the aviation value chain. Currently, foreign financiers and lessors are the biggest beneficiaries of India's growing pie." the report reads.

Secondly, the recommendation also includes the guidance for India to follow the global market leader Ireland's blueprints for the regulatory framework. Ireland has concertedly established a regime by entering into double-tax avoidance treaties which support key aspects of aircraft financing and leasing with over 70 countries. Coupled with a tax credit policy for non-treaty countries, low corporate tax rate on leasing companies, provision for accelerated depreciation on aircraft, and a supportive skills development system, Ireland's aircraft lessor business model has been proven to be a resilient one over the last several decades with several years of placement visibility, and swift repossession of aircraft from a financially-strained airline and redeployment elsewhere in the world. Ireland is a signatory to the Cape Town Convention (CTC 2001). Of the world's entire fleet of leased aircraft, over 50% of them are managed through Irish companies.

A report by aviation consultancy firm CAPA last year showed the leading global centres for aircraft leasing and trading include, amongst others, Ireland, Singapore, the US, Hong Kong and Japan. However, Ireland leads by a significant margin, supported by a comprehensive portfolio of Double Taxation (Avoidance) Agreements (DTAs) that minimise the exposure of aircraft leases to the purview of local taxation regimes. "This reduces costs for both lessees and lessors. Furthermore, to encourage such activity and the benefits they deliver to the local economy, several of these jurisdictions levy very competitive corporate tax rates on aircraft lessors. However, given the scale and value of such activity, even at concessional rates this brings in millions of dollars of tax revenue and supports thousands of jobs in the domestic economy" the report adds.

As per IATA, airlines spent $67.6 billion in 2016 on aircraft maintenance and services, a large part of which is typically channelled through the aircraft/engine lease agreement. The contribution of Indian MRO (maintenance, repair and overhaul) entities to this market domestically is currently about $800 million, as per estimates of the MRO Association of India. Engine and components remain the highest cost segments with respectively 41% and 23% of MRO financing needs. With a 5.1% increase per annum, the global MRO market size is estimated to reach $100.6 billion in 2026, and the size of Indian entities providing MRO services in India and abroad estimated to increase from $1.8 billion in 2017 to about $3.2 billion in

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