In a bid to take a big slice of the global pie, aircraft leasing companies that start their business from the International Financial Services Center (IFSC) of Gujarat International Finance Tec-City (GIFT-City) have been exempted from the payment of corporation tax and withholding tax on leasing transactions. In addition, more concessions are offered to them if they lease planes in the multi-service special economic zone near Ahmedabad.
The exemptions are part of the government’s effort to turn the country into a global hub for leasing planes to rival hubs such as Dublin or Singapore by enticing foreign lessors to start operations from here. Even though the move has been described as crucial to making the world’s third-largest domestic aviation market self-sufficient in leasing, experts have raised concerns about the lack of provisions to make financing such deals easy. available.
The lack of a strong financing framework in GIFT-City may prove to be a brake on the significant take-off of aircraft leasing, as the industry thrives in centers that have easy access to capital. To fail would then be to miss the chance to grab a slice of the $170 billion global aircraft leasing industry, experts say. “Aircraft leasing has two components: aircraft trading and aircraft financing. Any capital-intensive industry needs financing, and the airplane is a lasting asset. However, the leasing business needs strong financial support,” says Rohit Tomar, partner at aviation consultancy Caladrius Aero.
According to data compiled by BT, since 2011 the cumulative order book of India’s major scheduled carriers stands at more than 1,100 aircraft. Currently, most Indian carriers rely on hubs like Ireland to meet their rental requirements. For example, all sale and leaseback transactions of IndiGo, India’s largest airline, are processed from Dublin, that too at one of the lowest negotiated prices. But with the incentives unveiled recently, private players should start renting domestically, experts say.
“The private sector is doing its part by registering at least 13 leasing companies with GIFT-City. However, the government and regulators like the Reserve Bank will need to do more in allowing and incentivizing banks to fund transactions,” says Dinesh Pardasani, partner at law firm DSK Legal.
On the other hand, other global hubs have strong financial support for the aircraft leasing industry. For example, lenders in Dublin, the Irish capital, are backed by European banks, while companies in Singapore are backed by state-owned Temasek Holdings as well as Singaporean banks, and companies based in Hong Kong and mainland China are backed by Hong Kong banks. and China.
“In this context, why should leasing companies locate here when the policy is not complemented by financing? There is a provision in India under the Alternative Investment Fund (AIF), Category II, but then where is that equity support? asks Tomar. Ajay Kumar, managing partner at law firm KLA Legal, says these funds can have their skin in the game, “provided proper arrangements are made for this”. Although these funds generally invest in the capital markets, GIFT-City may consider appropriate programs to attract these funds to help donors here.
Although some Indian banks have provided working capital loans to some carriers, they have generally avoided financing aviation. The hesitation likely stems from their previous unsavory experiences with carriers such as Kingfisher Airlines and Jet Airways. But there could be a way out in terms of funding for players looking to set up shop here.
“The most viable option for GIFT-City lenders will be to raise funds in the overseas market. Foreign currency loans are available in the international market at very attractive rates compared to what Indian banks would normally charge says Kumar of KLA Legal, adding that foreign lenders typically charge 2.5% interest, depending on factors such as the borrower’s balance sheet and securities offered.
However, overseas financing agreements are often replete with endorsements. “Funding from abroad leads to additional costs, which makes it less attractive to do business from GIFT-City. A push towards cost-effective financing and clarity on aircraft repossession will make it attractive to lessors,” says DSK’s Pardasani. But Kumar disagrees. Indian banks, he says, charge around 10-12% interest, which is too expensive. To overcome this challenge, several options such as Indian Exim Bank guarantees are being explored to bring Indian lenders to the table, sources say.
From a demand perspective, the country is expected to need more than 2,200 new planes over the next few decades due to growing demand for air travel, according to Boeing’s forecast for South Asia. This includes 2,000 single-aisle and 240 jumbo jets. In such a context, a thriving national rental industry can only help. And, it is to this end that GIFT-City offers numerous tax incentives. This includes 100% corporate tax exemption for 10 years, tax deduction for depreciation on aircraft at 40% of depreciated value, zero withholding tax on rent paid to lessors, GST on lease payments by Indian airlines at 5% cents, no stamp duty and no capital tax provided the lessor commenced operations on or before March 31, 2024.
Yet challenges persist. “The challenge here is that relevant departments such as customs and GST have not been sensitized to the new framework. If we make a payment in IFSC dollars, we still get calls! says Arun Lohiya, COO of CAD Ventures, a local aircraft sales and purchase company that recently financed six small planes for an Indian airline.
Ministries of finance and civil aviation may therefore need to review the financial aspect of aircraft leasing and develop a strong financing ecosystem. With this, GIFT-City could be a game-changer and provide a viable option for offshore lessors, Kumar said, adding that now is the time for India to have a local aircraft leasing ecosystem that can serve the country and his neighbors. Carriers are certainly hoping the idea will take off.