GIFT City: Transforming Aircraft Leasing in India

With India’s aviation sector expanding rapidly, GIFT City is emerging as a key enabler in the aircraft leasing space. By offering a well-structured financial ecosystem, regulatory clarity, and competitive tax incentives, it is attracting global players to set up operations in India. Nitin Sarin, Managing Partner, Sarin & Co. shares insights on how GIFT City is shaping the future of aircraft leasing

GIFT City is revolutionising the aircraft leasing industry in India, offering a structured and globally competitive environment for lessors and financial institutions. Located in Gujarat, this futuristic financial hub operates as a Special Economic Zone (“SEZ”), providing significant tax advantages and a robust regulatory framework to attract international players. Designated as an International Financial Services Centre (“IFSC”), it provides a conducive ecosystem for banks, insurance companies, and financial institutions looking to expand internationally.

Nitin from Sarin & Co. highlights, “With India’s aviation sector experiencing rapid growth, GIFT City serves as a transformative force, enabling domestic businesses to participate in global aircraft leasing while capitalising on an efficient regulatory structure and attractive tax benefits.”

Recognising this surge, the Indian government designated Aircraft Lease as a financial product under Section 3(1)(d) of the International Financial Services Centre Act, 2019. This move incentivises foreign aircraft lessors to relocate their operations to India and establish Special Purpose Vehicles (SPVs) in GIFT City.

Nitin elaborates, “The creation of a structured framework ensures that international players have a seamless entry into India, making the country more self-reliant in aircraft leasing and financing. Moreover, this regulatory clarity encourages long-term investments and stability in the sector.”

How Lessors Can Establish in GIFT City

Steps for Setting Up an 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.

Several operational models exist for setting up an aircraft leasing unit in GIFT City:

• A subsidiary or joint venture under Indian corporate laws (Finance Company)
• A branch (Finance Unit) of an investing entity
• A limited liability partnership (LLP), trust, or any other designated structure as approved by the International Financial Services Centers Authority (IFSCA)

For financial lease operations, a minimum capital requirement of USD 3 million or its equivalent in freely convertible foreign currency is required to be maintained at all times. This ensures that only entities with sufficient financial backing participate in the market, contributing to its credibility and stability. In contrast, operating lease units must maintain a minimum capital requirement of USD 200,000 or its equivalent in freely convertible foreign currency at all times, allowing for greater participation, including smaller leasing firms looking to establish their presence in GIFT City.

Nitin notes, “These capital thresholds are designed to ensure a sustainable ecosystem where financially capable players contribute to the industry’s long-term growth. By setting clear minimum capital requirements, GIFT City aims to foster a structured and stable financial environment that not only supports well-established leasing companies but also encourages new entrants to scale their operations efficiently. This ensures a balanced mix of global lessors and domestic firms, thereby strengthening India’s position in aircraft leasing.”

Tax Benefits in GIFT City

1. Direct Tax Incentives:

• IFSC units enjoy a 100% income deduction for any ten consecutive years within their first 15 years of operation, providing significant tax savings and encouraging long-term financial commitments in GIFT City.
• Post tax-holiday, companies can opt for a 22% corporate tax rate, plus applicable surcharge and cess, which remains lower than India’s standard corporate tax rate and ensures a competitive financial landscape for businesses operating within GIFT City.
• IFSC units with foreign currency income benefit from a 9% Minimum Alternate Tax (MAT) rate, which is significantly lower than the rate applicable to other domestic companies. This preferential tax rate is designed to enhance the competitiveness of IFSC entities and encourage international financial activities within GIFT City.
• 40% depreciation is allowed on aircraft and aircraft engines in the IFSC, providing significant tax benefits to lessors by allowing accelerated depreciation, thereby reducing taxable income and improving overall cost efficiency in leasing operations.
• Non-resident lessors benefit from tax exemptions on royalty or interest income for aircraft leased to an IFSC unit, provided the unit commences operations by March 31, 2025. This exemption is aimed at reducing the cost of financing and encouraging more global lessors to establish operations in GIFT City, thereby enhancing India’s presence in the international aircraft leasing industry.

Nitin emphasises, “These tax benefits are strategically designed to position India as a competitive alternative to other established aircraft leasing hubs such as Ireland and Singapore. The comprehensive incentives not only lower operational costs for lessors but also create a more predictable regulatory environment that fosters long-term investments. With a well-structured framework, GIFT City is steadily gaining traction as a preferred destination for aircraft leasing.”

2. Indirect Tax Incentives:

• Import of aircraft or engines into IFSC is exempt from Basic Customs Duty (BCD), provided that the aircraft or engine lands in the SEZ for such exemption to apply. However, specific exceptions have been granted where landing is not feasible due to the absence of an airport within the SEZ area.
• Aircraft leased by IFSC units to Indian airlines for scheduled air operations is also exempt from BCD, provided that the lease agreement is structured within the framework of the IFSC regulations. This exemption helps reduce operating costs for domestic carriers and encourages Indian airlines to lease aircraft from entities established within GIFT City, further strengthening India’s position in the global aviation leasing market.
• Aircraft leasing transactions in IFSC attract a 5% Integrated Goods and Services Tax (IGST) under forward charge, applicable on lease rental payments made by Indian operators. This structure ensures compliance with India’s tax regime while maintaining a competitive tax framework, which is aligned with global leasing jurisdictions to encourage more lessors to establish operations in GIFT City.

Beyond Tax: Non-Tax Benefits for Lessors

Apart from tax advantages, GIFT City offers several non-tax benefits that make it attractive for aircraft lessors:

1. Ease in Aircraft Repossession and Export
   • Generally, before exporting an aircraft from India, the operator must provide a GST certificate, which can be difficult in adversarial situations where disputes arise between the lessor and the operator. This requirement can create significant operational hurdles, especially in cases where the operator is unwilling or unable to cooperate. Such challenges can lead to unnecessary delays and financial losses for lessors attempting to reclaim their assets.
   • In GIFT City, lessors maintain control over the GST certificate as they are responsible for paying GST on a forward charge basis. This not only simplifies the compliance process but also ensures that lessors can fulfill customs requirements without relying on operators, thereby mitigating potential disputes and operational delays.
2. Avoiding Foreign Re-Registration Hassles
   • Typically, repossessed aircraft must be de-registered in India and re-registered abroad, a process that involves significant time and financial costs. This requirement adds layers of complexity, as an aircraft that is repossessed is often not in the best operational condition, making it difficult to immediately re-register with another aviation authority. The additional repair and compliance costs before re-registration can be burdensome for lessors, causing potential financial strain and longer turnaround times before the aircraft can be leased again.
   • GIFT City allows aircraft to remain on the Indian registry while finding a new operator, which eliminates the need for immediate de-registration and foreign re-registration. This not only saves significant time and expenses but also ensures that lessors have greater flexibility in placing the aircraft with a new lessee without additional regulatory hurdles.
3. Regulatory Efficiency & Business-Friendly Approach
   • The core team at GIFT City is recognised for its proactive and solution-oriented approach, offering a stark contrast to the bureaucratic hurdles commonly encountered in other regulatory environments. They actively engage with stakeholders, providing swift resolutions and fostering a business-friendly atmosphere, which has significantly contributed to the increasing attractiveness of GIFT City as an aircraft leasing hub.
   • Additionally, the IFSCA serves as a single-window regulator, covering the RBI, SEBI, and IRDAI, streamlining regulatory processes and ensuring faster approvals. This centralised approach reduces bureaucratic hurdles, enabling businesses to operate efficiently within GIFT City while minimising delays associated with multiple regulatory clearances.

Nitin remarks, “One of the key advantages of GIFT City is the responsiveness of its regulatory team. The streamlined approvals and single-window clearances significantly reduce operational friction for businesses. The ability to interact with a single regulatory body, rather than dealing with multiple layers of bureaucracy, ensures that leasing companies can set up and operate efficiently. Furthermore, the regulatory team actively works to address industry concerns, making GIFT City an attractive destination for global lessors seeking a stable and transparent business environment.”

Challenges & Roadblocks

Despite its advantages, some challenges remain:

1. Dominance of Ireland in Global Aircraft Leasing
   • Most aircraft lessors leasing into India have well-established operations in Ireland, which already fulfills global “substance” requirements, making it less compelling for them to shift to GIFT City.
2. Uncertainty on Tax Benefits Beyond 10 Years
   • The current tax holiday lasts for ten years, and there is ambiguity about whether similar incentives will be extended beyond this period, apart from setting up a new entity to requalify for benefits.
3. Concerns Over Retrospective Taxation
   • India has a history of retrospective taxation, leading to concerns among investors regarding the stability and predictability of the country’s regulatory environment. While the likelihood of such taxation in GIFT City remains remote, past instances have made stakeholders cautious when considering long-term commitments in India’s aviation leasing sector.

“While the risk of retrospective taxation in GIFT City remains low, investors still need assurance that the regulatory environment will remain stable in the long run,” Nitin emphasises. He further explains, “Many international players hesitate to enter new markets due to regulatory unpredictability. Ensuring a consistent tax framework will be key in building investor confidence and attracting long-term commitments to GIFT City.”

Conclusion: A Transformative Future for Aircraft Leasing in India

GIFT City represents India’s ambitious leap into global aircraft leasing and financing. The regulatory framework, tax benefits, and ease of doing business have already made it a promising destination. However, addressing key challenges will be crucial to attracting global players and ensuring long-term sustainability.

Nitin concludes, “With continuous policy evolution, proactive regulatory support, and strong stakeholder collaboration, GIFT City has the potential to emerge as one of the top aircraft leasing hubs in the world. The structured incentives, seamless regulatory framework, and commitment to ease of doing business make it an attractive destination for global lessors. As more international players recognise its advantages, GIFT City is poised to play a pivotal role in shaping India’s aviation leasing industry.”

Sarin & Co. has played a pivotal role in facilitating transactions within GIFT City, providing strategic guidance to businesses in navigating regulatory frameworks and optimising the advantages of this financial hub. As international stakeholders increasingly recognise its potential, India’s aviation leasing sector is poised for substantial expansion, reinforcing the country’s position as a competitive player in the global market.