Budget 2026: Clearing tax hurdles for Aerospace and Defence Ambitions
By R Anil Kumar
Bengaluru, January 30, 2026. As India gears up for Budget 2026, the aerospace and defence sector eagerly anticipates substantial financial boosts and tax reforms to fuel its expansion.
Industry leaders speaking to R Anil Kumar, on the sidelines of Defence and Aerospace conference, in Bengaluru, emphasised that a stable, forward-looking tax regime could slash costs, streamline technology transfers, bolster home-grown defence strengths, and sharpen India’s edge in the global aviation market.
At the heart of these expectations lies the International Financial Services Centre (IFSC) in GIFT City, which is fast becoming a hub for aircraft and engine leasing, thanks to robust government backing and evolving rules. Regulations here already allow leasing of aviation training simulators and ground support gear alongside planes and engines.
Extending current income tax perks to these vital assets would unlock affordable financing for training setups and operational tools. This step would ramp up local training prowess, elevate safety benchmarks, and propel India’s vision of emerging as a premier aviation centre, they opined.
A key demand is folding Aviation Turbine Fuel (ATF) into the GST net. Right now, ATF faces excise duties and varying state VATs, blocking airlines from claiming input tax credits and triggering a cascade of taxes.
Shifting ATF to GST at a fair rate could trim airline expenses, fortify their finances, and spur fleet growth and route networks. It would also cut airfare costs, boost India’s standing against international rivals, and align with aims to expand regional links and tourism.
The GST on premium economy seats needs a rethink too. These seats sit between economy and business class, offering a slight comfort boost, yet they draw the full 18% GST rate—matching business class—despite fares barely above economy.
Reclassifying premium economy into the 5% GST bracket would better match its value, enhance affordability, and ignite demand in this burgeoning market segment.
Airlines also grapple with chronic build-up of input tax credits (ITC). Most inputs carry 18% GST, but passenger services mostly sit at 5%, leaving surplus credits unused.
Allowing these credits to offset reverse charge mechanism liabilities would ease cash strains, cut inefficiencies, and foster a sounder financial landscape for carriers.
In defence, clear guidance on Income Tax Act section 10(6C) exemptions is vital. This clause spares foreign firms from tax on royalties or technical fees in deals with the Indian government, aiding global tie-ups.
With rising government-to-government pacts and Defence Public Sector Undertakings as key players, Budget 2026 should affirm this exemption for nominated foreign partners. A time-bound process for section 10(6C) notifications would add certainty, lift OEM confidence, and hasten vital defence initiatives.
The drone sector eyes customs duty waivers on imported components too. Amid schemes like the Drone Production Linked Incentive and a push for local UAVs, such relief would supercharge native production and growth.
For industries with lengthy asset cycles, tangled supply chains, and decade-spanning investments, tax predictability is essential. Budget 2026 measures could iron out frictions, cementing India’s role as a cutting-edge aerospace and defence leader on the world stage.
