Mentor’s Comment:  The aviation sector is vital for India’s economic growth, connectivity, and global integration. The Protection of Interests in Aircraft Objects Bill, 2025 strengthens legal protections for lessors, encouraging foreign investment and lowering leasing costs. This directly supports fleet expansion, enhances regional connectivity, and boosts India’s ambition to become a global aviation hub, especially through GIFT City.

Today’s editorial talks about the aviation sector, which is a key part of India’s infrastructure. This topic is useful for GS Paper 3 (Infrastructure) and GS Paper 2 (Policy and Governance) in the UPSC exam.

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Let’s learn!

Why in the News?

Last week, Parliament passed the Protection of Interests in Aircraft Objects Bill, 2025. This new law sets up a legal system to handle disputes between airlines and aircraft lessors over valuable aviation assets like planes, helicopters, and engines.

What is the main objective of the Protection of Interests in Aircraft Objects Bill, 2025?

• To Protect Aircraft Lessors’ Rights: The Bill allows aircraft lessors to repossess aircraft and engines swiftly in case of default by airlines. Eg: During GoFirst’s insolvency (2023), lessors couldn’t recover their planes due to legal delays—this Bill now provides legal backing for quicker repossession.
• To Implement the Cape Town Convention and Protocol: Aligns Indian aviation law with global standards to enhance legal predictability and reduce risk for international investors. Eg: Many countries that have implemented the Convention see lower leasing costs and more confidence from global leasing firms.
• To Boost Investment and Reduce Costs in Aviation: Encourages leasing activity in India (especially at GIFT City) by reducing legal and financial uncertainties, lowering aircraft leasing costs by up to 8–10%. Eg: IndiGo and Air India’s fleet expansion could benefit from cheaper leases, ultimately leading to lower operational costs.

Why was the Bill needed despite India signing the Cape Town Convention in 2008?

• Lack of Implementing Legislation in India: Though India signed the Convention in 2008, it did not pass a domestic law to give it legal force. Eg: Courts couldn’t apply the Convention directly, leading to confusion during airline insolvency cases like GoFirst.
• Conflict with Existing Indian Laws: Domestic laws such as the Insolvency and Bankruptcy Code (IBC) often clashed with the Convention’s provisions. Eg: In GoFirst’s 2023 case, NCLT imposed a moratorium that barred lessors from repossessing aircraft, conflicting with the Convention’s rights.
• Low Compliance Score on Global Index: India scored low on the Cape Town Compliance Index (score of 50 out of 100), reducing global confidence. Eg: Lessors viewed India as high-risk, making leasing more expensive and legally uncertain.
• Previous Airline Failures Exposed Legal Gaps: Airline shutdowns like Kingfisher, SpiceJet, and GoFirst highlighted legal ambiguities in asset repossession. Eg: Lessors struggled for months to retrieve aircraft and were also burdened with costs like parking fees.
• To Encourage Investment and Reduce Risk Perception: The absence of a robust legal mechanism discouraged foreign leasing firms from doing business in India. Eg: The new Bill aims to improve investor sentiment and facilitate cheaper leases for growing airlines like IndiGo and Air India.

How did legal conflicts affect aircraft repossession during GoFirst’s insolvency?

• Moratorium under IBC Prevented Repossession: The NCLT imposed a moratorium that barred lessors from reclaiming their aircraft, despite defaults by GoFirst. Eg: Lessors were legally restricted from de-registering and removing aircraft even though the Cape Town Convention allows it.
• Delay in Aircraft Maintenance and Access: Legal restrictions also denied lessors access to their aircraft for routine maintenance, risking airworthiness. Eg: Aircraft parked at airports couldn’t be inspected or serviced, causing additional losses to lessors.
• Lessors Incurred Extra Operational Costs: Lessors had to pay dues on behalf of GoFirst, including airport handling, parking, and office space charges. Eg: These unexpected expenses made the leasing business financially unviable under Indian legal conditions.

What concerns do lessors have about India’s tax regime and GIFT City push?

• Stringent Tax Scrutiny under GAAR: India’s General Anti-Avoidance Rule (GAAR), implemented in 2017, allows tax authorities to deny tax benefits if a leasing company is deemed to exist solely for tax-saving purposes without substantial commercial activity. Eg: Lessors cannot merely establish a shell entity in GIFT City to avail tax perks; they must demonstrate genuine business operations, unlike the more lenient frameworks in countries like Ireland.

• Challenges in Financing Support: Unlike other global leasing hubs, Indian banks are cautious about lending to airlines due to past airline failures, leading lessors to rely on overseas funding, which increases costs. Eg: European banks support leasing businesses in Ireland, but in India, the absence of similar backing means lessors face higher financing costs.

• Uncertainty in Tax Incentives Implementation: While GIFT City offers tax incentives, ambiguity in their application and interpretation by tax officials can lead to procedural delays and increased compliance burdens. Eg: Lessors may face delays due to unclear tax exemption procedures, affecting their operational efficiency.

• Requirement to Establish Physical Presence: The push for lessors to set up operations in GIFT City necessitates a physical presence, involving additional costs and administrative efforts. Eg: Lessors must establish offices and staff in GIFT City to comply with regulatory requirements, unlike jurisdictions that allow more flexible arrangements.

• Regulatory and Operational Challenges: Despite incentives, lessors face regulatory hurdles and operational challenges, such as the absence of an airport in GIFT City, complicating logistics for leased aircraft. Eg: Newly leased aircraft need proper parking facilities, and the lack of an airport in GIFT City poses logistical issues.

Way forward: 

• Enact and Operationalize the Bill Swiftly: The government should ensure the Protection of Interests in Aircraft Objects Bill, 2025 is not only passed but implemented effectively, with clarity on how it interacts with the Insolvency and Bankruptcy Code (IBC) and other domestic laws.
• Enhance Infrastructure and Regulatory Clarity at GIFT City: India should build supportive infrastructure (like an airport) in or near GIFT City and offer clear, predictable tax and regulatory policies to attract top-tier leasing companies.

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