- in India
- within Tax, Privacy and Employment and HR topic(s)
- with Finance and Tax Executives
- with readers working within the Banking & Credit and Transport industries
QUICK SUMMARY
In Part 1 of this series, we looked at how international passenger transprot benefits from a VAT exemption. In Part 2, we explored how aircraft leasing and leasing chains can qualify for exemption, but only if certain conditions are satisfied.
But what happens when those conditions are not met? In that case, VAT becomes chargeable, and the impact can be significant.
When the Airline Condition Fails
The exemption is available only where the recipient qualifies as an airline holding an Air Operator's Certificate (AOC). If the lessee is not a certified airline, for example, if it is a private company leasing an aircraft for corporate use, the supply falls outside the exemption. The transaction is therefore subject to VAT at the standard rate.
When the "For Reward" Condition Fails
To qualify for the exemption, the aircraft must be operated for reward, meaning it is used for commercial purposes. Recreational or private operations fall outside the scope of the relief. Accordingly, where an aircraft is leased to an entity using it primarily for private business or leisure travel, VAT must be charged on the supply.
When International Transport is Not Chiefly Involved
The exemption is designed to support airlines engaged chiefly in international transport. In practice, this means that at least 50-60% of the airline's operations should be international. Where an airline operates primarily domestic routes or fails to meet this threshold, the exemption does not apply, and VAT becomes chargeable.
Short-Term Leasing
Special rules apply to short-term hire of aircraft (30 days or less). In these cases, the place of supply is where the aircraft is actually made available to the customer. If the aircraft is delivered in Malta, Maltese VAT is chargeable, even if the aircraft is later flown internationally.
Non-Airline Entities in Leasing Chains
As explored in Part 2, aircraft are often leased through SPVs and intermediaries. Where a supply is made to an entity that does not itself qualify as an airline, that transaction will generally be taxable, even if the aircraft is eventually used by an exempt airline downstream. Each step must be assessed separately, and exemptions cannot be extended across the entire chain.
Why It Matters
These scenarios highlight that exemptions in aviation VAT are the exception, not the rule. The burden of proof rests with the supplier to demonstrate that the conditions are satisfied. Where they are not, the supply is subject to VAT at the standard rate, a cost that can materially affect cross-border leasing and operating structures.
Conclusion
The VAT exemption for aviation supplies is a valuable relief, but it is far from automatic. If any of the key conditions (airline status, operation for reward, chiefly international transport, or place of supply) are not met, VAT becomes chargeable. For airlines, lessors, and intermediaries, understanding these distinctions is critical. The difference between exemption and liability often lies in how precisely transactions are structured and documented.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
