Aircraft lease rentals may be taxed in Budget

The finance ministry is likely to reintroduce a withholding tax on aircraft lease rentals in Budget 2007-08. Airlines entering into lease agreements up to March 31, 2007 are currently exempt from the tax. The move will adversely impact private carriers’ expansion plans beyond the current fiscal. According to private airlines, lease rentals are as high as 20-25% of their operational costs. The withholding tax itself can be as high as 48% of the annual lease rental, depending on the country where the lessor is based. Aviation industry sources said airlines would probably pass on the burden to consumers. This could raise airfares across the board, they added. The civil aviation ministry is, however, trying its best to extend the deadline. It has already represented to the finance ministry that the move would deal a body blow to the fledgling industry, ministry sources said.

In his Budget for 2004-05, finance minister P Chidambaram had proposed that payments made by Indian companies to acquire a foreign aircraft or aircraft company on lease would not be exempt from withholding tax. This was aimed at airlines that leased aircraft from companies based in tax havens, to avoid double taxation. He had, however, dropped it after opposition from Indian carriers. In India, almost two-thirds of the 300-odd aircraft are on lease, and lease rental on a plane from the Airbus A320 family is $20 million. The newly formed Federation of Indian Airlines is also pressing the finance ministry for an extension to the deadline. When contacted, Indian Airlines CMD Viswapati Trivedi said, “The tax payment upfront will adversely affect the whole industry.”

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