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Overview

The Gujarat International Finance Tec-City (‘IFSC GIFT City’) in the Gandhinagar district of Gujarat is India’s first operational smart city, which stands as a testament to India’s ambitious vision to create a global financial and IT services hub.  It operates as a Special Economic Zone (‘SEZ’), offering businesses multiple incentives and tax benefits.  It is also designated as an International Financial Services Centre (‘IFSC’), providing a conducive environment for foreign investors, financial institutions, banks, insurance companies, and other financial service providers to operate globally.

Aircraft Leasing: A Strategic Move for Aviation Growth

Noting the growth of the aviation industry in India, aircraft leasing was recognised as a financial product[1] in October 2020.  This was followed by release of the International Financial Services Centres Authority’s (IFSCA) framework, released for aircraft leasing in February 2021, which paved the way for entities to get registered as a ‘Finance Company’ or a ‘Finance Unit’ within GIFT City.

Such reforms have attracted players from the aviation sector to Gift City, with helicopter lessors like Vman Aviation, business jet lenders like ModAir Aviation, and commercial airlines like Indigo and Air India establishing their presence in Gift City.  The establishment of leasing entities in Gift City marks a pivotal development, considering the Government’s intent to make the Gift City an alternative aircraft leasing hub to centres like Dubai, Singapore, and Ireland.  During the last three years, Gift City has witnessed the registration of more than 25 aircraft leasing companies.

Ship Leasing: Tapping unutilised potential

The maritime industry is a strategically important sector for India, given the country’s vast coastline and massive global and domestic trade via sea routes.  However, many leading shipping operators choose countries like Singapore, Hong Kong and Dubai as their base and hence, there was a need to align India’s shipping regime with such centres.  With the aim of achieving this objective, the benefits of GIFT City were extended to ship leasing along the lines provided to aircraft leasing. Accordingly, the Framework for Ship Leasing was published on 16 August 2022 by IFSCA[2].

The Framework permits operating ship leasing as also finance ship leasing.  Under an operating lease arrangement, the lessor can undertake to operate leases, voyage charters, commercial transactions for employment of ships, asset management support services, sale and lease back, purchase, transfer, and other similar services in relation to ship leasing.  Also permitted in finance leasing is a hybrid of finance and operating lease activities, and all activities that are permissible under the operating lease.

Eligibility Requirements

Aircraft leasing entities can be set up in GIFT City either as a company, Limited Liability Partnership, trust, or branch. The minimum capital requirement for an entity engaged only in operating leasing, a non-core activity, is US$200,000 (or equivalent) or US$3,000,000 (or equivalent) if the entity wishes to engage in finance leasing or a mix of operating and finance leases which are core activities.

Similarly, for a ship leasing entity engaged in an operating lease (non-core activity) or finance lease, including a hybrid of finance and operating lease (core activity), the capital requirement is US$200,000 (or equivalent) or US$3,000,000 (or equivalent), respectively. Further, ship leasing entities registered in Gift City also have to comply with provisions of the Merchant Shipping Act,1958.

Additionally, there are certain application, registration, and annual fees of varying amounts that are payable depending on the type of lease activity.

Why Gift City

GIFT City extends an array of benefits to its inhabitants, setting a new benchmark for business operations in India. These benefits include:

Unified Regulatory Regime:

IFSCA provides a single window clearance for licensing and business approvals to GIFT City entities, thereby dispensing the need for separate approvals from the Reserve Bank of India, Insurance regulators, the Securities Exchange Board of India, etc.

Deemed foreign jurisdiction from an exchange control perspective:

Entities registered in Gift City are considered as ‘person resident outside India.’  This grants freedom to conduct transactions between IFSC and non-residents in convertible foreign exchange

Access to financial services:

Gift City is home to various financial institutions, banks, and insurance companies, providing access to a wide range of services that support leasing activities.

Access to global markets:

Gift City offers a gateway to access global markets without encountering regulatory complexities often encountered in the domestic market.

Tax incentives

State of the art Infrastructure and skilled workforce

Tax Benefits for entities established on or before 31 March 2025

Aircraft and ships are considered ‘international assets,’ and hence, a country’s direct and indirect taxes framework affect the way deals between lessors and lessees are structured.  Less taxes imply reduced rentals and relaxed deal terms.

Traditionally, aircraft and ship leasing companies have been hesitant to to enter India due to high rates of direct taxes, non-exemption of withholding taxes, stamp duty, GST at multiple touch points, and customs duty on imports, reducing the attractiveness of aircraft leasing in India.

A key aspect of GIFT City’s appeal lies in its favourable tax regime, designed to attract investments.

The table below outlines the primary direct and indirect tax benefits available to all aircraft and ship leasing entities registered and operating in the IFSC[3]:

Benefit	Description
Corporate Tax Rate	100% profit-linked deduction for any 10 consecutive years out of 15 years post registration of units (however, no group loss relief transfers available), subject to commencement of operations by the unit in IFSC by March 31, 2025 Post-tax holiday period, taxes will be at 25.17 % under the new tax regime.
Minimum Alternate Tax (‘MAT’)/ Alternate Minimum Tax (‘AMT’) on lessor	MAT/ AMT will be applicable at 9% of book profits (plus applicable surcharge and cess).  MAT is not applicable for units opting for a new tax regime.
Interest expense on aircraft or shipping loan	Deductible at arm’s length
Depreciation on Aircraft	Depreciation on aircraft and engines allowed at 40% on a written-down value basis, with unabsorbed depreciation carried forward indefinitely.
Depreciation on Ships	Depreciation on ships[1] is allowed at 20% on a written-down value basis, with unabsorbed depreciation carried forward indefinitely.
Capital Gains on Disposal of Aircraft or Ship	Capital gains are also eligible for a 100% tax holiday benefit.
Withholding Tax (WHT) on Lease payment	No WHT on lease payment, as Royalty, to a non-resident (i.e., Royalty for non-residents exempted from tax)
WHT on interest	No WHT on interest payments made to a non-resident (i.e., interest for non-residents exempted from tax).
WHT on rent	Any rent or supplementary rent paid by any person being a lessee to a unit of an IFSC for the lease of a ship or aircraft shall not be subjectable to WHT subject to the satisfaction of prescribed conditions.
Dividend from subsidiary in GIFT City	Dividend is taxable in the hands of recipient shareholder. No WHT exemption provided on dividend payouts.
No Permanent Establishment	Gift City residency mitigates Permanent Establishment exposure in India.
Double Tax Avoidance Agreements	Residents can benefit from India’s extensive network of DTAAs
Stamp duty	No stamp duty on activities related to setting up units in the IFSC and acquisition of any movable property (including aircraft) or immovable property for a period of 10 years commencing from August 2020.  For ship leasing, the stamp duty waiver is for five years.
GST	No GST on lease to a GIFT City entity or service received by a GIFT City entity. However, GST at the rate of 5% applies on operating lease rentals received by GIFT City entity from entity based outside GIFT City.
Unpaid GST on repossession	Historically, on aircraft/ship repossession, the lessor was liable to pay any unpaid GST prior to repossessing the aircraft/ ship. Now, Indian carriers leasing aircraft/ships from GIFT City entities are required to pay GST on a forward charge basis to the lessor. Such advance payment of GST with lease rentals will address the challenges faced by the lessor of making outstanding GST payouts on repossession.
Custom duty	No basic duty on imports landing in SEZ

General Conditions

All transactions must be conducted only in freely convertible foreign currency only, except administrative expenses that may be incurred in INR.  The lessor entity can maintain books of accounts and financial information in foreign currency, as declared at the time of making the application.  Also, post finalisation of financial statements, the same must be submitted to IFSCA authorities within a period of 15 days along with other records or documents as required by the IFSCA authorities.

Way forward

The aircraft leasing business can significantly contribute to the growth of the economy through higher tax revenue collection, employment opportunities, and affordable air travel. Given the immense demand for aircraft from airlines and exponential growth in passenger traffic within India, it is vital to develop this business line within the IFSC in India.

Similarly, with India’s increased focus on trade and port-led development, demand for shipping vessels is on the rise. Cargo traffic has also consistently risen, and this trend is likely to continue. India’s strategic geographical location between the Middle East and Southeast Asia makes it a pivotal hub for global shipping routes.

By bringing the aircraft and shipping lease activities within its regulatory regime, IFSCA has provided a perfect platform to promote the growth of leasing operations, which will, in turn, result in the development of an aircraft/shipping leasing industry in India. Not only will this provide additional benefits in the form of retention of foreign currency within the country, but it will also create new employment opportunities and substantial business opportunities for the Indian banking and insurance sector.

Also, while there is a high focus on reforms for lessors setting up shop in the IFSC, incentives are also required for airlines/shipping companies to encourage them to lease from GIFT City rather than other hubs like Ireland, Dubai, or Singapore. Tax holidays, subsidies, and other incentives for lessors should be considered to encourage them to start leasing from GIFT City.

 

[1] Aircraft lease, including operating and finance lease and any hybrid of operating and finance lease of aircraft or helicopter and engine of aircraft or helicopter or any other part thereof, is covered as a financial product.

[2] Amended in March 23 to include voyage charters under operating lease

[3] Additionally, Government of Gujarat provides various state level subsidies which have not been covered in this article.

[4] Ship includes (i) ocean-going ships including tugs, survey launches, dredgers, barges and other similar ships used primarily for dredging purposes and sighing vessels with wooden hull (ii) Vessels ordinarily operating on inland waters, not covered by sub-item (iii) below (iii) Vessels ordinarily operating on inland waters being speed boats.