The Union Budget for 2026-27 is reportedly considering a significant policy change that could reshape financing in India's aviation sector. According to industry sources cited by the Hindu Business Line, the government may grant infrastructure status to aircraft under the asset category to support the expansion of the country's aviation industry. This move could address long-standing financing challenges faced by airlines, particularly smaller operators struggling with high borrowing costs and limited access to credit.

Current Aviation Landscape and Growth Projections

India's aviation sector is experiencing unprecedented growth momentum, with strong indicators pointing to continued expansion. The current operational landscape and future commitments demonstrate the sector's robust trajectory:

Financing Challenges in Aviation Sector

The aviation industry currently faces significant financing constraints that limit growth potential. Smaller airlines particularly struggle with accessing aircraft through leasing arrangements, leading some to consider outright purchases. However, these plans have been hampered by high interest rates and limited willingness among domestic banks to finance aircraft acquisitions. The reluctance of domestic lenders stems from risk concerns associated with aircraft financing and the substantial capital requirements involved.

Infrastructure Status Benefits and Framework

Granting infrastructure status to aircraft could provide multiple advantages for the aviation sector. The classification would enable airlines to access lower-cost loans, including financing under the Priority Sector Lending (PSL) framework regulated by the Reserve Bank of India. Under PSL norms, banks are required to allocate a portion of their lending to specified sectors, potentially improving credit availability for aviation companies.

The infrastructure classification would also broaden the lender base significantly. Insurance companies would be able to participate in aircraft financing, while banks could offer longer repayment tenures. This expanded participation could help address the current gap in aviation financing and provide more flexible terms for airlines.

Precedent and Policy Rationale

The government has established a precedent for extending infrastructure status to movable assets. In the previous Union Budget, commercial shipping vessels received infrastructure classification, addressing earlier concerns about assigning such status to non-fixed assets. This precedent has strengthened the aviation industry's case for similar treatment of commercial aircraft.

Industry executives suggest that infrastructure status could encourage a shift from operating leases to finance leases. This transition could help address domestic lenders' risk concerns while reducing high borrowing costs. Additionally, eligibility under PSL norms could better align financing structures, while rupee-denominated loans for aircraft purchases could reduce foreign exchange outflows as fleet additions accelerate.

Government's Strategic Focus

The government demonstrates keen interest in improving credit access for the aviation sector, particularly targeting start-up airlines and operators of small-capacity aircraft. This focus aligns with broader objectives of supporting emerging players in the aviation market and ensuring sustainable growth across different segments of the industry. The proposed infrastructure status represents a strategic intervention to address systemic financing challenges that have historically constrained aviation sector expansion.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.