In India most airline operators source their aircraft fleet either through finance lease or through operating lease from a foreign lessor.
In a finance lease, lessor transfers substantially all the risks and rewards of ownership of the aircraft to the lessee on payment of lease rentals. During the lease period, the lessor amortises the capital invested by it and at the end of the lease period, the lessee has the option to buy the aircraft at its residuary value. On the other hand, in an operating lease, the lessor transfers only the right to use an aircraft in return of consideration in the form of lease rental.
Under the Goods and Services Tax (GST) regime both finance lease and operating lease attract GST, in accordance with Section 7 read with Schedule II of the Central Goods and Service Tax Act, 2017 (CGST Act).
Finance lease in India initially attracts GST on payment of lease rental, being a supply of service by transfer of right to use an aircraft and later at the time of its sale, GST is payable on the sale consideration as it is treated as supply of goods by transferring of title.
GST is also levied on lease rentals payable in an operating lease, as it is a supply of service by transfer of the right to use an aircraft for consideration.
GST on lease transactions, which is covered under the category of “Supply of Services”, i.e. right to use any goods for any purpose, is chargeable at same rate as on supply of similar goods. Thus same rate of tax is applicable on both instances.
The applicable rate of GST as specified under Chapter 88 of the Indian Harmonized System of Nomenclature are as follows:
| HSN Code | Chapter Description | Rate (%) | Cess (%) |
| 8802 | Other aircraft (for example, Helicopters, Aero planes), other than those for personal use. | 5 | |
| 8802 | Aircrafts for personal use | 28 | 3 |
Sl. No. 537 of Notification No. 50/2017-Cus, dated 30th June 2017 provides for exemption from Integrated Goods and Services Tax (IGST) levied under Section 3(7) of the Customs Tariff Act, 1975 for aircraft, engines and spares imported into India subject to certain conditions. Accordingly, no IGST is payable at the time of import of aircraft on lease, and only GST is payable on the lease rental.
As foreign lessors do not have permanent establishment and GST registration in India, the liability to pay GST on lease rentals is on the lessee (Indian airline operators) under the reverse charge mechanism. Sufficient safeguards are generally also provided to the lessors under tax gross up provisions included in the leases, while drafting terms by legal and tax professionals.
The unprecedented situation posed by COVID-19 gave rise to certain problems for airlines in India. Most of the aircraft were grounded resulting in majority of airlines defaulting on their lease rental commitments. The lease agreements are generally stringent and have provisions regarding repossession of aircraft by lessor in case of default in payment by the lessee.
For repossession and export of the aircraft form India, the lessor is required to deregister the aircraft with Director General of Civil Aviation (DGCA) by making a deregistration request along with the Irrevocable Deregistration and Export Request Authorisation (IDERA) granted by the airlines in favour of lessor.
Upon receipt of such request, DGCA is required to publish the same on its website and issue an email to all the relevant airport operators and other government organisations to calculate the outstanding dues relating to the aircraft for a period of three months prior to the date on which the deregistration request is made to DGCA.
The lessor is required to settle all the outstanding bills with the concerned government departments in order to receive a No Objection certificate (NOC), which is a pre-requisite for DGCA to permit the export of aircraft outside of India.
Even though, under the reverse charge mechanism and in accordance with the gross up provisions in a lease, the GST is required to be paid by the lessee, however, the lessor is forced to settle the outstanding GST dues (with interest) for it to receive the NOC from the Customs/GST department or contest the demand through litigation.
May be there is a need to review this procedural practice and for all the government authorities to work together and find an amicable solution for both the Indian government and the foreign lessors. This move will strengthen India’s position as an aircraft lessor friendly jurisdiction.
