Duties and Taxes on Import/Purchase of Business Aircraft

There is a long overdue requirement to rationalise and simplify the tax regime to promote the growth of the industry, encourage leasing activity and allow seamless transfer of assets within the country.

Issue: 9 / 2019By Rohit Kapur
By Rohit Kapur
Managing Director, Arrow Aircraft Sales and Charters

 

When the Goods and Services Tax (GST) was rolled out in July 2017, it brought an end to the erstwhile aircraft import duty regime that was introduced in India in 2007, in an irrational move that brought the growth of the fledging Business Aviation (BA) industry to a grinding halt. The growth, which showed approximately 25 per cent CAGR in 2007, was reduced to a trickle by 2011, and finally some negative figures by 2013-14. Despite several recommendations to the Government of the day, nothing really changed, and no relief was given. In 2017, with the introduction of GST, there was hope that the decade old injustice done to the industry would be reversed and some relief given to allow growth. But as they say, what the government gives with one hand, it takes away by the other! The introduction of GST, reduced import duties to reasonable numbers, but imposed GST at ridiculous numbers, resulting in creating further pain to the companies importing, buying or selling aircraft. For the first time, aircraft purchasers in the “Private” Category, were clubbed with “Sin Goods” in the highest 28 per cent bracket of the GST! The problem is acute. The irrational duties and taxes are not only creating a negative sentiment in the industry but creating its own share of problems for the government. In the succeeding paragraphs, I intend to explain the issues in a simple manner without any jargon, as I find that this is a confusing subject, and despite being in effect for over two years, most of the people are not clear about it.

THE PRESENT STATUS

I have attached the details in a Table (next page) for those who would like to take a deep dive. Simply explained, aircraft can be imported, or purchased, in either one of the following ways:

  • Purchase/Import for Private Use: This implies that the aircraft can only be used for private or personal use and cannot be used for commercial use or charters. Most leading companies would like to buy their aircraft in this category since they want to use it for their senior leadership to travel for promotion of business. Most companies do not intend to make profits by these operations, and this is a mere tool for business growth and increasing outreach, the same way that politicians use aircraft during elections. This attracts the following duties/taxes:
    • Basic Custom Duty (BCD): 3 per cent
    • Social Welfare Surcharge (SWS): 10 per cent of BCD
    • IGST: 28 per cent
    • Compensation Cess: 3 per cent
    • Credit on BCD and SWS will not be available
    • Input Tax Credit (ITC) of IGST will be available if aircraft is used for furtherance of business. However, no guidelines laid down as to how this will be established.
  • Purchase/Import for Non-Scheduled Operators of Commercial Operations (NSOP): This implies that the aircraft can only be operated for commercial purpose and not for any private use. Every flight on the aircraft (except some test and maintenance flights etc) must be invoiced, and the applicable GST for charters needs paid to the government. This attracts the following taxes:
    • BCD: 2.5 per cent
    • SWS: 10 per cent on BCD
    • IGST: 5 per cent
    • Credit on BCD and SWS will not be available
    • ITC on IGST will be available

THE CHALLENGE

  • While most large companies want to use their aircraft in the private category, the vast difference between the GST (5 per cent for NSOP vs 28+3=31 per cent for Private Use) is a major disincentive for purchase of aircraft in the private category. Most companies end up setting up a subsidiary as an aviation entity, with an NSOP, and have a captive use of charters for their senior leadership from their own entity. This is a perfectly legal option. Though the government loses out on an initial lumpsum windfall of IGST, since every flight attracts a GST for charters, the government ends up collecting the same amount of GST (or maybe even more, depending on the number of hours flown), in a period of 3-5 years of use.
  • When the government implemented higher IGST for private use, with the hope of higher collections, the practical issue is that only 10 per cent of the aircraft are being bought or imported in the private category, hence there is huge shortfall for the government in estimated IGST collection.
  • Due to a large number of companies preferring to go for the NSOP route, rather than the private use, the number of NSOP companies with one or two aircraft has drastically increased, thereby increasing the headache for the DGCA, which follows a stricter oversight for NSOPs, as compared to private operations, as NSOP is a commercial operation for the public. It puts an additional strain on DGCA resources.
  • Since the BCD on the NSOP and the Private category imports have a difference of 0.5 per cent (2.5 per cent vs 3.0 per cent), the NSOP user gives a declaration at the time of import to the Customs and Excise Authorities, that the aircraft will only be used for commercial operations, as the importer has availed a concession on the import duty. When this same NSOP operator, after a few years of use, wants to sell his aircraft, to someone who wants to buy it privately, there is requirement to get a NOC from the Customs and Excise department that they have no objections for the same. This process can take months, and in most cases, the Customs and Excise department refuses to give the NOC, or insists that the concessions that were availed at the time of import needs to be refunded to the government as the aircraft will now be used in a private category. Since the process is so long and tedious, most sellers prefer to sell the aircraft overseas, and not in the domestic market, hence causing precious loss of the aircraft from the Indian inventory. With every aircraft sold out of the country, there is a corresponding loss in jobs for the people supporting it.

COMPARISON OF DUTY STRUCTURE: PURCHASE OF AIRCRAFT

PARTICULARSERSTWHILE REGIMEGST REGIME
Purchase of aircraftImportImport
 
  • The applicable import duty and credit eligibility on import of aircraft/spares was as follows:
  • Under the GST regime, taxable event shall be import of taxable goods wherein IGST shall be applicable on import of aircrafts/spares
 Aircraft - NSOPAircraft - NSOP
 – BCD (2.5%)– BCD (2.5%)
 – ADC and SAD-NIL– SWS on BCD (10%)
 – EC + SHEC on BCD (3%)– IGST (5%)
 – Credit of BCD and EC + SHEC on BCD was not available– Credit of BCD and SWS on BCD would not be available
  – Credit of IGST would be available as credit
 Aircraft - personal useAircraft - personal use
 – BCD (3%)– BCD (3%)
 – ADC (12.5%)– SWS on BCD (10 %)
 – SAD (4%)– IGST (28%)
 – EC + SHEC on BCD and ADC (3%)– compensation cess (3%)
 – Credit of BCD and EC + SHEC thereon was not available– Credit of BCD and SWS thereon would not be available
 – Credit of ADC was not available since the same was not covered by the definition of capital goods– Credit of IGST would be available if aircraft is used for furtherance of business
 – Credit of SAD was not available to service provider– Credit of compensation cess would be available to offset against compensation cess liability (if any) and the same is used for furtherance of business

Source: Deloitte-BAOA Report of 2018

THE RECOMMENDED SOLUTION

This problem has been prevailing for the past 12 years, ever since the differential duty structure was introduced in India in 2007, and has hampered the growth of the BA industry, as well as domestic transactions of aircraft from one buyer to another within India. It has also put the brakes on leasing activity of aircraft in the country, as leasing companies, being non NSOP, will have to pay 28 per cent IGST and 3 per cent Cess at the time of purchasing the asset, and then only be able to lease their assets to the end users, that is the NSOP companies or private operators. Presently the effective outflow of foreign exchange for lease of aircraft for both commercial, NSOP and private aircraft is exorbitant and been reported as almost $6 billion per year, though this is not a confirmed figure. This amount of foreign exchange can be saved in case leasing activities can be encouraged in India.

Some of the simple steps that the government can take to resolve these issues are as follows:

  • Equate the BCD on aircraft import for both NSOP and Private category. Ideally, this should be brought down to zero, as commercial airlines attracts zero import duty, and NSOP is also a commercial operation. If there must be a differentiation, it must be in the IGST being charged to NSOP and private operators, and not in the BCD. This will resolve the problems of Customs and Excise for domestic sale of aircraft, as the NSOP importer will not be required to give any undertaking for availing concessions on BCD for NSOP at the time of import.
  • Presently, Business aircraft are classified as either under NSOP use, or for private use. This creates unnecessary confusion. Reclassify the aircraft operations category as the following:
    • Commercial Use, that is NSOP: These aircraft can only be used for charters and should attract 5 per cent IGST with ITC as presently being followed. They should be taxed in the same way as airlines are being taxed.
    • Non-Commercial Use. These are those companies which buy the aircraft for their business use and do not have the requirement for commercial use of the aircraft. The flying activity promotes business development and adds to the GDP of the country, besides creating jobs etc. They should attract an IGST of 12 per cent with ITC. This should also attract lesser DGCA oversight as compared to NSOP, as it is not meant for the use of commercial passengers.
    • Non-Commercial Use-Private: These are those aircraft which are bought by individuals for their personal pleasure and not intended for promotion of business. These can be levied an IGST of 18 per cent with or without ITC, as this is the only category which is not adding to the GDP of the country. This should attract minimum oversight by the DGCA.
  • Leasing companies should be given an exemption to import aircraft without paying any BCD or IGST at the time of purchase. Once they further lease the aircraft to end users, the applicable rate of IGST should be levied, depending on how the aircraft is being used, for commercial or non-commercial use.
  • To encourage the activity of Aircraft Management, the IGST should only be applicable as per the end use of the aircraft, and not as per how it is being acquired. For example, Person A, wants to buy an aircraft in his company, but wishes to use it only commercially. He only wants to be the owner, and desires to allow an NSOP company (which in this case will be the Aircraft Management Company) to use the aircraft as an NSOP aircraft, he should at the time of import/purchase declare that the end use of the aircraft will be under NSOP of ABC company, and hence will pay only 5 per cent IGST. Thereafter, even if he uses it personally, he will be invoiced by the Aircraft Management company as per the prevailing market rate with applicable GST. This will help Person A to be be the legal owner of the aircraft, use it commercially without acquiring his own NSOP, and avail all depreciation benefits. This will also help in consolidation of the industry to fewer and better run NSOP companies, functioning as Aircraft Management companies, with proper safety procedures, and will facilitate DGCA to implement oversight on these companies without a strain on their resources.

To conclude, there is a long overdue requirement to rationalise and simplify the tax regime to promote the growth of the industry, encourage leasing activity and allow seamless transfer of assets within the country. With increased growth and activity, the government will stand to earn a much higher revenue, even if the reduced IGST, as per recommendations, is implemented.