Considering that nowadays airlines industry is almost always in the news for one reason or another, this may be the best time to highlight one of the issues being faced by this industry.
As everyone may be aware, a little more that 80% of the commercial aircrafts are leased and the lease is mostly from foreign vendors. It is noticed that Indian lessors in this field are almost negligible. The Indian commercial airline industry takes aircrafts on lease from foreign vendors, where the lease agreement usually also covers engine, landing gear, auxiliary power unit and maintenance / replacement / refurbishment clauses. It may also be noted that since the aircraft industry runs on very tight margins, they cannot afford an extended downtime of the aircraft. Appreciating the business models in the aircraft industry, the Finance Ministry has also always been supportive.
The issue highlighted in this article has more to do with the implementation rather than the intent of the legislature.
Lease of aircraft
Sl. No. 547A of Notification No. 50/2017-Cus., dated 30-06-2017 provides for exemption from IGST levied under Section 3(7) of the Customs Tariff Act, 1975 for aircrafts, aircraft engines and other aircraft parts imported into India under a transaction covered by item 1(b) or 5(f) of Schedule II of the Central Goods and Services Tax Act, 2017, subject to certain conditions. The conditions for availing exemption ffrom IGST under Section 3(7) of the Customs Tariff Act include execution of a bond binding the importer to pay IGST on import of aircraft on lease basis, and to re-export within three months from date of expiry of lease period. The notification provides for exemption to import of aircrafts and parts imported under either transfer of right in goods without transfer of title or transfer of right to use any goods for any purpose for cash or deferred payment. That is, the exemption is provided to import of aircrafts, aircraft engines, and other aircraft parts which are under lease.
The relevant part of the Notification is provided below for ease of reference:
| S.No. | Chapter/ Heading | Description of goods | Standard rate | IGST | Condition No. |
|---|---|---|---|---|---|
| 547A | 88 or any other chapter | Aircrafts, aircraft engines and other aircraft parts imported into India under a transaction covered by item 1(b) or 5(f) of Schedule II of the CGST Act, 2017 | - | Nil | 102 |
However, Basic Customs Duty (BCD) is not exempted as per the same serial number. BCD exemption can be sought under Sl. No. 538 or 545, or certain other serial numbers, depending on whether aircrafts are being imported or parts of aircrafts are being imported. Further, conditions imposed for availing exemption under the said serial numbers, if any, must be complied with.
It may be noted that as per the provisions, it is recognized that the transaction under Sl. No. 547A is a service transaction, and hence duties levied under Section 3(7) of the Customs Tariff Act which are imposable on import of goods are exempted, provided IGST is paid on the import of lease service. In that case, BCD should also be exempted under the same serial number, since BCD is also imposed on import of goods.
The aircraft industry is at present required to seek exemption under other serial numbers and adhere to other conditions. That is, though exemption is available for duties levied under Section 3(7) of Customs Tariff Act because the law recognizes the transaction as a service, for exemption from basic customs duty the transaction is treated as import of goods. The same transaction is painted with a different brush – once to colour it as goods, and another time to colour it as a service.
Ignoring the aforesaid issue, it may be noted that when leased aircrafts are imported into the country, the specific identification numbers for critical components of the aircraft including the aircraft engine / landing gear / auxiliary power unit are noted in the bill of entry while extending / availing exemption under the said notification.
Lease agreements generally extend to maintenance of the aircraft, and parts including engine / landing gear/ auxiliary power units. That is, under such agreements, aircrafts along with relevant parts are flown out of India for maintenance. Instead of spending precious time on repairing the required parts, the leasing companies usually replace the parts with already serviced parts to reduce the downtime of aircrafts. The aircrafts are thus brought back with the replaced engines / landing gear / auxiliary power units.
The issue arises when the aircrafts with the replaced parts are flown back to India. Although Sl. No. 547A allows for exemption to aircraft engines under lease, it will be appreciated that at the time of first import under exemption, the imported aircrafts and the engine part numbers, landing gear part number, and auxiliary power unit part number are recorded in the bill of entry. The replaced parts do not come under a separate lease agreement. However, at the customs port, the officers contend that either the parts as shown in original import documents are repaired and returned for claiming the IGST exemption, or exemption is not available on the replaced parts.
Therefore, duty is demanded on the import of the replaced engines / landing gear / auxiliary power units. The importer is back to the basics, to avail the exemption against a serial number other than 547A and treat the same as an import of goods after adhering to certain conditions. If no condition can be adhered to, then the importer can avail exemption under Sl. No. 545, making effective rate of BCD as 2.5%, with no exemption available for duties imposed under Section 3(7) of the Customs Tariff Act.
However, cash strapped airlines can ill-afford cash flow to this extent. It is also doubted whether the legislative intent was to collect duty on the replaced engines. Minor correction in line with the legislative intent will go a long way in easing stress on the airlines businesses.
[The author is Principal Associate, Lakshmikumaran and Sridharan, Bengaluru]
