Gujarat International Finance Tec-City (“GIFT City”), stands as a symbol of India’s aspirations to become a global financial hub. Located in the state of Gujarat, India, it is one of the most ambitious urban development projects in the country. It operates as a Special Economic Zone (“SEZ”), offering various incentives and tax benefits to businesses and investors. It is also designated as an International Financial Services Centre (“IFSC”), providing a conducive environment for financial institutions, banks, insurance companies, and other financial service providers to operate globally.

Noting the explosion in the aviation industry in India and with a view of facilitating the initiation of aircraft leasing from India, the Government has notified an ‘Aircraft lease’ as a financial product under Section 3(1)(d) of the International Financial Services Centre Act 2019, thereby providing various tax incentives to foreign aircraft lessors to relocate to or set up Special Purpose Vehicles (“SPV”s) at the SEZ of GIFT City.

A subsidiary, joint venture, newly incorporated company under Indian corporate laws (Finance Company), a branch (Finance Unit) of an investing entity, limited liability partnership, trust or any other structure as may be designated by the International Financial Services Centers Authority (“IFSCA”) may be used to establish operations in an IFSC.

For aircraft under financial lease, a minimum capital requirement of USD 3,000,000 or its equivalent in freely convertible foreign currency is required be maintained at all times.

Whereas, for operating lease, a minimum capital requirement of USD 200,000 or its equivalent in freely convertible foreign currency shall be maintained at all times.

The IFSCA issues frameworks for various products from time to time which govern the respective financial activities within the special zone.

Some of the taxation benefits as provided in GIFT City are as follows:

  1. Direct tax:
  • IFSC units, including aircraft leasing and financing units, can avail of a 100% deduction from income for any ten consecutive assessment years within their first 15 years of operation;
  • Post tax holiday, 22% (plus applicable surcharge and cess) for domestic companies that opted to forego certain deductions (with an exception of deductions available to IFSC);
  • For IFSC units with income solely in foreign currency, the Minimum Alternate Tax (MAT) rate is 9%, offering significant savings compared to other domestic companies;
  • Aircraft and aircraft engines used in the IFSC can claim depreciation at a rate of 40%;
  • Non-resident lessors enjoy tax exemption on royalty or interest income from leasing aircraft to the IFSC’s aircraft leasing unit, given unit commencement by 31 March 2025.
  1. Indirect tax:
  • Import of aircraft/ aircraft engine(s) into the IFSC is not subject to basic custom duty (“BCD”). However, such aircraft / aircraft engine must land in SEZ for such exemption to apply (specific exceptions have further been granted given that there is no airport within the SEZ area);
  • Import of aircraft / aircraft engine(s) by an Indian airline (“Operator”) from an Indian lessor located in the IFSC is not subject to BCD, provided the aircraft is imported by the Operator (or on behalf of the Operator) for scheduled air operations;
  • Leasing of aircraft / aircraft engine(s) by a unit in the IFSC to an Operator is subject to Integrated Goods and Services Tax (“IGST”) under forward charge at the rate of 5% on lease rental payments.

Steps for setting up Aircraft Leasing unit in GIFT City:

  1. Identification of office space in GIFT SEZ and securing a Provisional Letter of Allotment from GIFT SEZ;
  2. Incorporation of unit in IFSC and obtaining tax registrations;
  3. Application to SEZ authorities for setting up IFSC unit. Upon approval, procurement of Final Letter of Allotment;
  4. Application to IFSCA under Aircraft Operating Lease Framework;
  5. Obtaining Bond-cum-Legal Undertaking and GST registration, Registration Cum Membership Certificate (RCMC), Importer-Exporter Code (IEC) and Certificate for fiscal benefits (Eligibility Certificate) from SEZ authority;
  6. Opening of bank account and commencement of business.

Non-tax Benefits:

The special zone boasts of a number of non – tax benefits for aircraft financiers and lessors, this non exhaustive list indicates some of these benefits.

  1. In the normal course of business, before an aircraft is permitted to be exported from India, a GST certificate is required from the Operator. In hostile situations, where the Operator and the lessor are at loggerheads, getting such a certificate becomes difficult. The GIFT City structure requires a lessor based in GIFT City to pay such GST on a “forward charge” basis, therefore is theoretically in control of the GST certificate and thus can easily comply with the customs requirements for export;
  2. Traditionally, aircraft repossessed from Indian operators would be de-registered and thus re-registered on a foreign registry before export from India. This process requires a repossessed aircraft (usually not in the best of conditions) to be restored before any foreign registry will register the aircraft. GIFT City allows a lessor to retain the aircraft on the Indian registry while looking for a new home;
  3. GIFT City and its core team is known to be very facilitative. They have earned for themselves a reputation of being approachable, helpful and have truly acted as “problem solvers”. This has been a major shift from the traditional bureaucratic outlook plaguing other Government organisations in India. The IFSCA also acts as a “one stop shop” for various regulators in India including the Reserve Bank of India, the Insurance Regulatory and Development Authority of India and the Securities and Exchange Board of India.

Challenges to Aircraft Leasing and Financing through GIFT City:

It is important to also highlight some challenges which this initiative has encountered over the initial few years of its commencement of operations in the field of Aircraft leasing and financing:

  1. A majority of the aircraft lessors leasing into India are well established in Ireland, already passing the substantive “substance” test. As a result, as far as operating leases are concerned, there is little impetus for them to set up a GIFT City structure;
  2. The tax holiday period is a ten-year period, there seems to be ambiguity as to what would happen to obtain similar benefits beyond the ten-year period (apart from setting up a new GIFT City entity with similar benefits);
  3. There have been various instances over the last few decades of retrospective taxation. While remote in the GIFT City scenario, practitioners highlighting the benefits and disadvantages of setting up in GIFT City are forced to highlight these past precedents to prospective GIFT City entrants.

It is evident from the above that GIFT City and its aims are indeed tremendously ambitious and set up the foundation for a solid aircraft leasing and financing ecosystem in India. The Firm has been involved in a number of transactions aiming to take benefit of the GIFT City structure(s) by making use of its advantages offered.

For further and detailed information and advice, please do not hesitate to contact us.