M.A.

IN AVIATION LAW
AND
AIR TRANSPORT MANAGEMENT

Name AMIT KUMAR

Roll No./I.D. No-

MALATM92_20

Year: 2 Semester: 3
AVIATION CONTRACTS AND TENDERS

Growth of Aircraft Leasing Agreements: Reasons for Popularity

30-11-2021
NALSAR UNIVERSITY OF LAW
HYDERABAD
Contents:
Chapter 1 Intrdouction……………………………………………………………………..4
Chapter 2. Concept of Aircraft leasing and its definition…………………………………….6
Chapter 3. Challenges and opportunities in making india a leasing hub and lessons to be
learnt from Aircraft leasing Soaring in China…………………………………………………7
Chapter 4. Impact of announcement in union budget 2021-22 in IFSC International
Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City)
as the location to onshore the offshore aviation leasing business in
India……………………………………………………………………………………………..10
Chapter
5. Conclusion……………………………………………………………………………………12
Chapter 1. Introduction

Aircraft leasing industry is a significant industry in the world today. Activities of the leasing
firms have increased drastically over the last few decades. The DBS Asian Insights, Feb 2017,
while quoting Market Research Future Report (2017) provides that, “the percentage leasing
activities on aircrafts has increased from 2 per cent in 1980 to over 50 percent in 2017. Between
2001 and 2017 alone, the change has been more than 25 per cent in the leasing activities on
aircrafts. The market size is estimated to increase to Electronic copy available at:
https://ssrn.com/abstract=3337708 283 USD 62 billion by 2023 recording a compound annual
growth rate (CAGR) of 4.7% from 2017 to 2023”. This trend clearly highlights the rate at which
the aircraft leasing business is growing across the globe and makes the potential of aircraft
leasing industry worth exploring for India too. Globally, there has been a rise in air passenger
traffic. As per Boeing’s Market Outlook (2016-35) it is estimated tha the global revenue
passenger-kilometers (RPK) is set to triple from 2015 to reach 17 trillion passengers-kilometers
by 2035 (within the next two decades). Asia-Pacific region has experienced an exponential
growth in air passenger traffic in the last decade. According to the International Air Transport
Association (IATA) 2018a, the travel demand in this region grew at 10.8 per cent year-on-year in
November 2017. India along with China and other Asian emerging economies is going through a
significant surge in air travel demand. Indian aviation industry has seen an unprecedented growth
in air passenger traffic both international and domestic over the past decade. As per the
Directorate General of Civil Aviation (DGCA) report 2017-18, the overall passenger traffic in
2017-18 grew at 16.08%. The year-on-year (2017-18) growth rate and compounded annual
growth rate (between 2007-08 and 2017-18) for domestic passenger traffic were recorded at
18.86% and 10.76% respectively. International passenger traffic also witnessed a positive growth
rate of 10.79% in 2017-18 and a CAGR of 8.32% between 2007-08 and 2017-18.

Subject of problem:

The growth outlook for aircraft leasing and finance industry makes it worth exploring and
developing in India. However, learning from the experiences of the leading global leasing centers
like Ireland, Singapore, the US, Japan, Hong Kong and China, India must identify and rectify the
key bottlenecks to the sector. It is necessary to closely study the factors behind the concentration
of aircraft leasing firms in these handfuls of jurisdictions.
 RESEARCH QUESTION
The researcher will examine, analyse and seek answers to the following questions through the project
work:

1. What are reasons of the popularity of Aircraft leasing in india?

2. What are the major hurdles in making india a leasing hub?
3. What impact will have the announcement of union budget of 2021-2022 fto develop and promote
the aviation leasing business in the IFSC International Financial Services Centre (IFSC) in Gujarat
International Finance Tec-City (GIFT City) as the location to onshore the offshore aviation leasing
business in India?

Research Hypothesis
The researcher believes that although due to globalization and liberalization we are witnessing
popularity of Aircraft leasing in india and as government intends to make india hub of aircraft leasing
in next 10 years.The researcher firmly believes that India will succeed in that depending how soon the
government hives off complex tax regime and bring ease more ease of doing business for foreign
investors.
RESEARCH METHODOLOGY:
The data for the current study has been taken from the secondary sources such as newspapers,
research articles, reports,websites and books etc.

Research Plan
1.INTRODUCTION
In this chapter researcher gives the brief history of aircraft leasing and its growing popularity in
india.
2. Concept of Aircraft leasing and its definitions.
3. Challenges and opportunities in making india a leasing hub and lessons to be learnt from Aircraft
leasing Soaring in China
4. Impact of announcement in union budget 2021-22 in IFSC International Financial Services Centre
(IFSC) in Gujarat International Finance Tec-City (GIFT City) as the location to onshore the offshore
aviation leasing business in India.
5. Conclusion
Chapter 2. Concept of Aircraft leasing and its definition
Before we approach to the research about aircraft leasing contract, it is necessary for us to add
some basic knowledge about aircraft leasing here.
2.1 The concept of leasing
Leasing is defined as a contract between a lessor and a lessee where the lessor provides the
lessee with the right to use assets, property owned by the lessor. The contract is usually for a
specified period of time, referred to as the ‘the lease term’-for which the lessee is obliged to pay
a stream of rental payments as agreed to between the lessor and the lessee. Generally, a lease
contract may not be cancelled by either party unless certain terms and conditions specified in the
contract trigger its termination (e.g., non-payment, bankruptcy). A lease contract may however
grant an early termination option on a specific date with or without penalty for various
predetermined reasons. At the expiry of the lease term, the lessee is usually required to return the
asset to the lessor, unless the lessor provides an option to the lessee to purchase of the asset. A
purchase option price is - 4 -
usually formula based and may be a variant on fair market value or a nominal amount depending
on the type of lease.
2.2 Capital leasing and operating leasing
The two basic types of lease—the operating lease and the capital lease—have important
differences. Generally speaking, if ownership of the leased asset is transferred to the lessee at the
end of the lease term following payments that represent the full value of the asset, it is a capital
lease; other wise, it is an operating lease. The precise classification changes slightly for legal,
taxation, and accounting purposes, but the main idea is that the greater the extent to which the
lessee acquires control and residual claims on the asset, the more likely it is that the lease is
classified as a capital lease.
In the United States, conventional criteria used for lease classification include:
(1) Transfer of ownership:

If a lease contract has the provision of ownership transfer of the asset, it is classified as capital
lease. It refers to the legal ownership in the lease contract which can be easily implemented in
practice.
(2) Bargain purchase option:
A bargain purchase option is a provision allowing the lessee to purchase the leased property for a
price that is significantly lower than the property’s expected fair value at the date the option
becomes exercisable. At the inception of the lease, the difference between the option price and
the expected fair market value must be large enough to make exercise of the option reasonably
assured. If there is a bargain purchase option in the lease contract, it is recognized as capital
lease.
(3) Economic life:
If the lease period equals or exceeds 75% of the assets economic life, most of the risks and
rewards of ownership are transferred to the lessee, and the capitalization is therefore appropriate.
The lease term is generally considered to be fixed, non-cancelable term of the lease.
(4) Recovery of investment:
If the present value of the minimum lease payments equal or exceeds 90% of the fair market
value of the asset, then the leased asset should be capitalized. The rationale for this test is that if
the present value of the minimum lease payments is reasonably close to the market price of the
asset, the asset is effectively being purchased.

Chapter 3. Challenges and opportunities in making india a leasing hub and lessons to be
learnt from Aircraft leasing Soaring in China

3.1 Challenges and Opportunities

The growth outlook for aircraft leasing and finance industry makes it worth exploring and
developing in India. However, learning from the experiences of the leading global leasing centers
like Ireland, Singapore, the US, Japan, Hong Kong and China, India must identify and rectify the
key bottlenecks to the sector. It is necessary to closely study the factors behind the concentration
of aircraft leasing firms in these handfuls of jurisdictions. Drawing on international experience,
India also needs to build a conducive tax regime backed by the government authorities for private
enterprises to flourish and compete with the incumbents.

3.2 Competitive Tax Regime

High corporate tax rate is major deterrent to development of leasing businesses. The effective tax
rates in countries like Singapore, Hong Kong, Ireland, etc. is as low as 10-17 per cent. In
addition, companies in aircraft leasing businesses pay taxes at even lower tax rate of 5-10 per
cent in such countries. The corporate tax rate in India is 25 per cent for the domestic businesses
with turnover of up to Rs 250 crore and 30 per cent for businesses with higher turnover. This is
much higher in comparison with the countries with established leasing industry. Under the
current regime, the government is determined to reduce the corporate tax rate, however, there is a
need for additional tax benefits for lessors to establish their base in India. Lower and competitive
tax rate for aircraft leasing firms is essential to build a viable leasing and financing market in the
country. To compete with low tax countries India can incentivize the aircraft leasing enterprise
through International Financial Services Centre (IFSC) set up in Multi Services SEZ that have
different tax rates and legal consequences. The industry can enjoy financial incentives and
regulatory freedom within such set-up with an adequate sunset clause. Such initiative if
implemented quickly is going to build a strong ground for the aircraft leasing industry to grow.

3.3 Withholding Tax and Double Tax Avoidance Agreements

Withholding tax is a crucial decisive factor for the airline operators and also attracts most of the
lessors’ attention. It is a general practice that lessors pass the withholding tax burden on to a
lessee in form of five years lease rentals. Since, withholding tax is levied on lease rental paid by
the lessee or operator, a high withholding tax implies high cost of leasing to the airline operators.
To understand it better let us assume there are two airline operators in country A and B each
willing to rent aircrafts on lease from lessor in country C. We also assume that gross lease rentals
(let us say Rs 10 crore per month) are same but the withholding tax is 20 per cent and 5 per cent
in country A and B respectively. Operator A, after withholding 20 per cent will pay Rs 8 crore to
lessor C whereas operator B will pay Rs 9.5 crore after withholding 5 per cent tax to lessor C.
The lessor, therefore, in country C would charge operator A a higher rental for it to receive the
same return as from operator in country B.
3.4 Availability of Diversified Sources Of Finances For The Lessors
Availability of capital for aircraft financing is another key factor determining the success of
aircraft leasing industry in India. Lessor industry is capital dependent as they need substantial
capital to maintain a diverse portfolio. Aircraft financing need is expected to grow at 5.9 per cent
CAGR in 2020. Today, aircraft lessors are the largest users (next being the US airlines and non-
US airlines) of capital market for aircraft financing.
The sector needs long-term funding and therefore, there is a need to expand equity and debt
market for this purpose. Private Equity, Hedge Funds, Pension Funds, Non-Banking Financial
companies (NBFCs), Provident Fund etc. are sources of capital that need to be explored for
aircraft financing as it is experienced globally that capital market today contributes to 40 per cent
of total aircraft financing for new deliveries. Capital market provides long term depth to the
leasing sector and therefore, a creating a vibrant Indian capital market would be advantageous to
the growth of leasing industry. Such financing mechanism will also bring greater breadth and
depth to the Indian financial sector which is presently missing in India.
3.5 Exposure to Foreign Exchange Risk
Leasing entities’ exposure to exchange rate risk also deters leading companies to establish their
aircraft leasing base in India. For example, dollar would be converted to INR in case of
capitalization by investors and vice versa during purchase of aircrafts from manufacturers.
Similarly, lease income will be converted from dollar to INR and vice versa during payment of
dividend and interest to stakeholders. A volatile exchange rate might affect the investment
decision of the foreign investors as multiple conversions increase the risk to the lessors. Such an
issue can be resolved if the home-grown lessor has Indian investors and creditors.

3.6 Building on Human Capital and Simplifying Leasing Process

Leasing industry is extremely sophisticated and requires advance technological management

system. India at present does not have many skilled personnel in this sector. Companies,
however, can hire skilled professionals from outside and perform training activities to develop a
deeper knowledge base and also understand the legal aspects of aircraft leasing. The government
must also look at the existence of a complex leasing process and the terms of negotiations in case
of dispute. It is important to have a sound dispute resolution mechanism for the parties to not get
mired in long-drawn legal battles.

3.7 Aircraft Financing Soaring in China: Learning for India

After the China Banking Regulatory Commission (CBRC) relaxed regulations on aircraft leasing
in 2007, many financial institutions, led by China’s big banks started building up their aircraft-
leasing arms and developing their own capabilities and scale in this segment. Given the
importance of financing and leasing in aviation sector, China in late 2013 began to participate
and invest in the global aircraft financial leasing to support the high upcoming demand for the
airplanes in China and across the world. In a study conducted by Boeing in 2017, Chinese
airlines’ demand for airplanes is likely to increase to 7240 valued at more than USD 800 billion
by 2037. This was around 40 per cent of the total deliveries forecasted for Asia pacific region.
Looking at these figures, future role of aircraft leasing and financing industry cannot be
emphasized more.

Government of China quickly adopted policy measures to accelerate the development path of
aircraft leasing industry by supporting financial leasing industry. It identified the major barriers
and adopted lessor friendly policies to quickly strengthen and augment the growth of leasing
industries. Backed with a strong financial sector, China amended the regulations of financial
leasing companies for better liquidity, it further lowered entrance threshold of financial leasing
 companies. Ministry of Finance, State Administration of Taxation and other government
organizations together published documents to promote aircraft leasing sector. They together
envisaged to break down barriers in financing, leasing, taxation and customs. As a result of such
actions by the state, within a period of not more than 2 years, 600 leasing enterprises of various
nature were registered in Shanghai free trade zone (FTA). Chinese financiers are increasingly
entering into aircraft finance market. China has also very well leveraged the strength of Hong
Kong as a center for aviation leasing.

Chapter 4. Impact of announcement in union budget 2021-22 in IFSC International Financial

Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT City) as the location
to onshore the offshore aviation leasing business in India

4.1 Aircraft regulations

in the IFSC The International Financial Services Centre (IFSC) in India was set up under the SEZ
route to help India unlock its potential in the international financial services space. The International
Financial Services Centres Authority Act (IFSCA Act), 2019,authorised the IFSCA as a unified
regulator, with representation from India’s main regulators – the Reserve Bank of India(RBI),
Securities and Exchange Board of India (SEBI), Insurance and Regulatory Development Authority
(IRDA), Pension Fund and Regulatory and Development Authority (PFRDA) – and the Government
on its critical decision-making bodies.
In order to tap the unleashed opportunity in aircraft leasing and financing and to make the vision of
‘Project Rupee Raftaar’ report a reality, in October 2020, the Central Government notified aircraft
leases, including operating and financial leases and any hybrid of operating and financial leases of
aircraft or helicopters and engines of aircraft or
helicopters, or any other part thereof, as financial products under the IFSCA Act, 2019. This step will
go a long way towards consolidating India-focused financial services activities in the IFSC.
Subsequently, the IFSCA, in order to facilitate the set-up of aircraft leasing businesses in the IFSC,
has provided a framework for enabling aircraft operating leases on 19 February 2021.

4.2 Direct tax benefits/implications for units in the IFSC

Presently, no WHT is required on interest paid to non-residents by units in the IFSC. This makes debt
funding for aircraft leasing activity lucrative, subject to thin capitalisation norms that may be
applicable on the IFSC units.
A taxpayer in India is allowed to claim an expense for any interest paid in respect of capital borrowed
for the purpose of its business. Where this interest is payable to a related company, the interest
expense is subject to thin capitalisation norms.

4.2 Withholding tax (WHT) on interest payment

As per the Finance Bill, 2021, it is proposed that no WHT would be required on aircraft lease
payments in the nature of royalty paid to non-residents by units in the IFSC that commence
operations on or before 31 March 2024. These units are also eligible for a profit-linked deduction
from their income.
4.3 WHT on lease payments
Aircraft would be a depreciable asset for a unit in the IFSC that owns it. The ITA follows a ‘block of
assets’ concept for depreciable assets.32 Any gain on the sale of the aircraft may be taxable in the
hands of the unit at 22% (plus applicable surcharge and cess).33
As per the Finance Bill, 2021, it is proposed that capital gains arising from transfer of asset being
aircraft or aircraft engine would be eligible for a 100% profit-linked deduction34 for any 10
consecutive years out of the first 15 years of operations being claimed by the unit in the IFSC on its
business income. provided that the unit shall commence operations on or before 31 March 2024.

4.4 Capital gains on disposal of aircraft

Till 1 April 2020, any dividend declared by an Indian company attracted dividend distribution tax
(DDT). This tax was payable by the company distributing dividends. The dividends were not taxable
in the hands of the recipient shareholder where DDT was paid on such dividends. However, in the
case of a unit in the IFSC, DDT was not applicable.
With effect from 1 April 2020, DDT has been abolished, and a company paying dividends to its
shareholders is required to withhold tax. Currently, there is no exemption with respect to WHT on
dividends paid by IFSC units, unlike the exemption from DDT. However, withholding tax on
dividend income shall be available as credit in the hands of the shareholders.

4.5 Tax and regulatory benefits/implications for foreign companies setting up units in the IFSC
As mentioned above, no WHT is required on interest paid to non-residents by units in the IFSC.
This interest income arising to a non-resident lender in respect of monies borrowed from it by an
IFSC unit is also exempt35 from tax in India. Thus, any interest from an IFSC unit received by a non-
resident lender would not be taxable in India.

4.6 Interest income from IFSC units (in the hands of the recipient)
As mentioned above, no WHT is required on aircraft lease payments in the nature of royalty made to
non-residents by units in the IFSC.
This leasing income which is otherwise taxable as royalty arising to a non-resident lender in respect
of aircraft leased from it by an IFSC unit is also exempt36 from tax in India. Thus, aircraft leasing
income in the nature of royalty from an IFSC unit received by a non-resident lessor would not be
taxable in India.

4.7 Future of GIFT CITY(IFSC) as leasing hub

The aircraft leasing business has huge potential to contribute to the growth of the economy through
higher tax revenue collection, employment opportunities and affordable air travel. At this junction, it
is vital to develop this business line in the IFSC in India, given the immense demand for aircraft from
airlines, high growth in passenger traffic and aircraft leasing’s position as the most profitable leg in
the aviation supply chain. Development of the aviation leasing sector in the IFSC will create a
complete ecosystem for the aviation sector in India. This would generate employment opportunities
in aircraft leasing companies as well as ancillary activities such as lease management, legal and
accounting.
In order to promote aircraft leasing in the IFSC, it was imperative to benchmark the ecosystem with
leading regimes. The recent tax and regulatory changes seek to bring India on par with those regimes.
With tremendous focus and support from the Central Government, India’s aircraft leasing market is
only set to become stronger and more attractive.

Chapter 5 Conclusion
It is evident that aviation traffic is going to rise globally in coming years. Countries like India and
China backed by strong social and economic development are undergoing rapid transformation. The
rise in the income level and government support towards better regional connectivity and improved
infrastructure has led to a rise in air traffic in these countries. The vision of the government to make
air travel affordable for Aam Naagrik (General Public) and to connect unserved and underserved
regions of the country via airways has led to a surge in air passenger traffic. This in turn has
expedited the demand for addition of new aircrafts by airlines operating in India. Rise in domestic
demand along with the rise in air passenger and freight traffic across Asia-Pacific has led to rapid
expansion of fleet by airlines.
Airlines are growing to meet the continued aviation transport demand globally. Additions of new
aircrafts are expensive and ties-up large part of operators’ balance sheet. Leasing enables the cost to
be spread across many years and allows the operators to fly at a relatively economical price. Hence,
aircraft leasing industry has a significant role to play in filling the financial gap and also assist airlines
in their fleet expansion. As a result, it is not only the western countries like Ireland and the US but
companies in Asian countries like China, Hong Kong, Singapore, etc. are also growing exponentially
to grab a larger share of the pie. China is the most prominent example of such growth where the total
number of major leasing companies increased from 4 in 2007 to more than 20 in 2017.
India must leverage its growing air traffic to establish a robust aircraft leasing industry which would
finance new aircraft deliveries through its skilled services. It is important to identify the roadblocks to
such development and quickly introduce a concessional tax regime for a certain time period and adopt
relevant policy measures to expedite the building of world class aircraft leasing industry in the
country.
Aircraft operating leasing offers stable and predictable cash flow and hence, is a profitable sector for
investors’ money. This sector which is missing in India today has a potential to contribute to the
growth of the economy in form of higher tax revenue collections, new employment opportunities and
affordable air travel for citizens. There is tremendous potential of aircraft leasing industry in India
and hence the government must study and understand the impediments to the growth and
development of aircraft leasing industry. The government can consult global players in this sector to
identify various major and minor roadblocks so that it can quickly undertake adequate short-term and
long-term reformative measures coupled with policy incentives to set up a robust aircraft leasing
industry in the country.

References:
CAPA (2018a) India, Aircraft Fleet & Finance Report, August
CAPA (2018b) India, Prospect for an Indian Aircraft Leasing Sector, September
DBS (2017), The DBS Asian Insights SparX report – Aviation, Aircraft financing, Feb
DGCA (2017-18), Handbook on Civil Aviation Statistics Electronic copy available at:
https://ssrn.com/abstract=3337708
290
FICCI (2018) Opportunities and Financing Outlook for Aviation Sector, FICCI & Yes Bank, March
IATA (2017), World Financial Symposium, September
MRF (2017), Global Aircraft Leasing Market Research Report - Forecast to 2023 - Market Analysis,
Scope, Stake, Progress, Trends and Forecast up to 2023, Market Research Future Published, Dec,
Pune, India