Budget 2026: Aerospace and defence sector seeks tax reforms
What's the story
As India gears up for Union Budget, the aerospace and defense (A&D) sector is pushing for higher budgetary allocations and targeted tax reforms. The industry believes that a progressive tax framework can significantly lower costs, facilitate technology transfer, bolster domestic defense capabilities, and improve India's global competitiveness in aviation. The International Financial Services Centre (IFSC) at GIFT City is also emerging as a key player in this transformation.
Leasing hub
IFSC's role in aviation leasing and training
The IFSC at GIFT City is evolving into India's dedicated aircraft and engine leasing hub. The center's regulations already allow for the leasing of aviation training simulators and ground support equipment, along with aircraft and engines. Extending income tax benefits to these assets could enable competitive financing for training infrastructure and operational equipment. This would not only boost domestic training capacity but also improve safety standards, furthering India's goal of becoming a global aviation hub.
Fuel taxation
GST inclusion for aviation turbine fuel
The A&D sector is also pushing for the inclusion of aviation turbine fuel (ATF) under the Goods and Services Tax (GST) regime. ATF currently attracts excise duty and state-level VAT, which prevents airlines from availing input tax credit. Bringing ATF under GST at a reasonable rate could reduce operating costs, strengthen airline balance sheets, and support fleet expansion. It could also make air travel more affordable and boost India's competitiveness in global markets.
Seating tax
GST on premium economy seating: A policy review
The GST treatment of premium economy seating, which sits between economy and business class, is another area that needs policy attention. Currently, it attracts 18% GST, the same as business class despite fares being only marginally higher than economy. Revisiting this classification and placing premium economy under the concessional 5% GST slab could better reflect its value proposition and stimulate demand in this fast-growing air travel segment.
ITC issue
Addressing structural ITC accumulation for airlines
The aviation sector also wants a solution to the long-standing problem of structural input tax credit (ITC) accumulation. Most airline input services attract GST at 18%, but passenger transport services are largely taxed at 5%. This leads to persistent accumulation of unutilized ITC. A progressive reform could allow utilization of accumulated ITC for discharging tax liabilities under the reverse charge mechanism, easing cash flow pressures and reducing cost inefficiencies in the sector.
Defense clarity
Clarifying tax exemptions for defense sector collaboration
For the defense sector, clarity on the applicability of tax exemptions under section 10(6C) of the Income Tax Act is crucial. This provision exempts foreign companies from tax on royalty or fees for technical services under agreements with the Government of India. With government-to-government defense partnerships becoming more common, Budget 2026 could clarify this exemption's availability to foreign entities nominated under such arrangements.