Aircraft leasing companies hit tax air pocket over SpiceJet dues

Unable to repossess aircraft they had leased to low-cost airline as tax authorities resist efforts

The world’s biggest aircraft leasing companies have hit a snag in India, with tax authorities resisting efforts to repossess aircraft they had leased to low-cost airline SpiceJet due to the carrier’s unpaid goods and services tax (GST) dues.

At least 13 Boeing 737 aircraft of SpiceJet, which the airline wants to return to trim its operational cost, are awaiting a no-objection certificate (NOC) from tax authorities, sources have confirmed. The permission to export these aircraft has been withheld. SpiceJet hasn’t paid GST dues, which are 5 per cent of each aircraft lease rental through a reverse charge mechanism.

Reverse charge is where the recipient of the goods or services — in this case, the airline — is liable to pay GST.

The aircraft were leased from companies backed by major financing companies, including ICBC Leasing (owned by the Industrial and Commercial Bank of China), Aviation Capital Group (ACG), and BBAM (owned by private equity firm Carlyle Group).

The companies didn’t respond to a query sent on the matter.

SpiceJet had moved the High Court of Punjab and Haryana against the excise and taxation department of Haryana, where it has petitioned to allow it to pay GST dues worth Rs 285 crore in 10 instalments, given that it is facing a liquidity issue due to the Covid-19 pandemic.

However, tax authorities have opposed this, saying the GST Act doesn’t permit payment in instalments for dues under self-assessment and have instead initiated recovery proceedings against the company.

Spooked by the regulatory hurdles, California-based ACG has moved court, seeking intervention to take back its aircraft. In a desperate move, the firm — represented by law firm Sarin & Co. — has said it is even willing to pay the GST liability of Rs 1 crore to take the aircraft back.

But authorities have refused to accept the payment, saying the dues have to be cleared by the airline since the importer of the aircraft was SpiceJet.

The hurdle, say executives of leasing firms, will force leasing companies and financers to adopt a cautious approach towards the Indian market and attach a higher risk premium, owing to concerns that they will face challenges in recovering their aircraft in the event of a default.

This will lead to higher lease expenses for Indian carriers. More than 85 per cent of aircraft used by Indian airlines are on lease.

“The current challenges faced by leasing companies in India are being closely watched by the world’s largest banks, financing and insurance companies. If the aircraft are not being exported smoothly, the fear may lead to increased cost of credit for Indian airlines, as well as damage India’s reputation in the leasing and financing market. The lessors cannot be held liable due to airlines’ dues,” said an executive of one of the leasing companies.

In response to a query, a spokesperson for SpiceJet said the logjam has occurred since the GST department is demanding the entire outstanding amount before granting NOC for export permission, resulting in delays in return of aircraft.

“The matter with regard to the payment of GST dues is pending consideration before the court and payment will be based on the outcome of the decision. The company is continuing to discharge its liabilities. Specific GST dues on respective aircraft are being paid upon their export. There is no negative impact on the relationship between SpiceJet and the lessors. They recognise this is more of an industry issue,” he said.

The hurdles also come at a time when India is trying to woo global leasing companies to set shop at Gujarat International Finance Tec (GIFT) City in Gandhinagar. Experts said such regulatory hurdles may prove to be a dampener.

The government has offered a clutch of sops, including tax holiday for capital gains for aircraft leasing companies and tax exemption for aircraft lease rentals paid to foreign lessors, to attract leasing companies to GIFT City.

Lawyers representing leasing companies said while the government has made certain amendments to the existing aircraft rules for ease of deregistration and export of aircraft, these changes have not provided adequate protection.

“In cases where there are pending dues to GST authorities, exporting aircraft becomes difficult due to lack of cooperation by the airline or administrative delays. If the government is keen on building an international leasing market in GIFT City, procedural hurdles have to be eased through amendments to the GST regime to enhance confidence,” said Rishiraj Baruah, aviation lawyer at law firm AZB & Partners and member of the Aviation Working Group — an advisory group of leasing companies and banks that works to develop favourable aviation financing and leasing regime.

A senior finance ministry official said the government is in the process of enacting a law to prevent lessors from facing such challenges.

“One proposal is to prohibit Customs authorities from creating a charge on the aircraft owned by third parties like leasing companies due to default by their airline customers. Such a decision to ease tax rules is likely to be soon approved by the GST Council,” said the official.

Leasing companies have often termed India a risky territory to do business in since it has not passed a supporting law, despite being a signatory to the Cape Town Convention — an international treaty to reduce the risks for aircraft financiers. This often results in lessors repossessing aircraft from Indian airlines at the slightest inkling of financial distress.

In 2019, Avolon — a Dublin-based lessor — pulled out seven aircraft of Jet Airways in one month since the airline started defaulting on bank debt.

“The risk profile will definitely go up when the leasing company feels its aircraft has got stuck since it is not able to exercise its rights under the Cape Town Convention. The lessors will then take steps to secure their future, such as demanding a higher security deposit or escalation of lease charges,” said Alok Anand, chief executive officer, Acumen Aviation, which is looking to set up a leasing firm in GIFT City.