Budget 2026: Jets, tanks and drones want tax turbulence out of the way

As India approaches Budget 2026, the aerospace and defence sector is looking for increased budgetary allocations and focused tax measures that can accelerate growth.

The industry believes that a progressive and predictable tax framework can play a pivotal role in reducing costs, enabling smoother technology transfer, strengthening domestic defence capabilities, and enhancing the global competitiveness of India’s aviation ecosystem.

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IFSC and Aviation leasing: Building a full-spectrum ecosystem

Backed by sustained government initiatives and a rapidly evolving regulatory framework, the International Financial Services Centre (IFSC) at GIFT City is steadily emerging as India’s dedicated aircraft and engine leasing hub, with growing relevance in global aviation finance.

To establish a full-spectrum aviation leasing ecosystem, IFSC regulations already permit leasing of aviation training simulators and ground support equipment alongside aircraft and engines.

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Extending the existing income tax benefits to also cover leasing of these essential assets would enable competitive financing for training infrastructure and operational equipment. Such a move would not only strengthen domestic training capacity but also enhance safety standards and support India’s ambition to become a world-class aviation hub.

Bringing Aviation Turbine Fuel under GST: Reducing costs and improving affordability

A long-standing industry expectation is the inclusion of aviation turbine fuel (ATF) under the GST framework. Currently, ATF is subject to excise duty and state-level VAT, which prevents airlines from availing input tax credit and results in cascading taxation.

Bringing ATF under GST at a reasonable rate may ease operating costs, strengthen airline balance sheets, and support fleet and network expansion. Importantly, it may also make air travel more affordable, enhance India’s competitiveness vis-à-vis global markets, and advance policy goals around regional connectivity and tourism growth.

Rationalising GST on premium economy: Supporting a growing segment

Another area requiring policy attention is the GST treatment of premium economy seating. Positioned between economy and business class, premium economy offers a modest comfort upgrade, yet it currently attracts 18% GST, the same rate as business class despite fares being only marginally higher than economy.

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Revisiting this classification and placing premium economy under the concessional 5% GST slab may more accurately reflect the product’s value proposition, improve affordability, and stimulate demand in this fast-growing segment of air travel.

Addressing structural ITC accumulation for Airlines

The aviation sector also seeks resolution of the long-standing issue of structural input tax credit (ITC) accumulation. While most airline input services attract GST at 18%, passenger transport services are largely taxed at 5%, leading to persistent accumulation of unutilised ITC.

A progressive reform would be to permit utilisation of accumulated ITC for discharging tax liabilities under the reverse charge mechanism. This would ease cash flow pressures, reduce cost inefficiencies, and support a healthier financial environment for the sector.

Strengthening global collaboration in Defence sector

From a defence sector perspective, clarity on the applicability of tax exemptions under section 10(6C) of the Income Tax Act remains critical.

This provision exempts foreign companies from tax on royalty or fees for technical services under agreements with the Government of India and plays an important role in facilitating international defence collaboration.

With the increasing prevalence of government-to-government defence partnerships and the central role of Defence Public Sector Undertakings as implementation agencies, Budget 2026 could explicitly clarify the availability of this exemption to foreign entities nominated under such arrangements.

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Additionally, introducing a time-bound framework for issuing section 10(6C) notifications may enhance predictability, improve Original Equipment Manufacturer (OEM’s) confidence, and support faster execution of strategic defence projects.

Supporting the drone ecosystem and indigenous manufacturing

The emerging drone industry is also hopeful of supportive measures in Budget 2026, particularly through customs duty exemptions on imported parts and components.

With initiatives such as the Drone Production Linked Incentive scheme and a growing focus on domestic UAV innovation, such measures may provide a meaningful boost to indigenous manufacturing and scale.

Conclusion: Tax certainty as a catalyst for long-term competitiveness

For a sector characterised by long asset lives, complex global supply chains, and multi-year investment commitments, tax clarity and predictability are foundational.

A Budget that prioritises these measures would not only reduce operational friction but also reinforce India’s position as a modern, globally integrated aerospace and defence powerhouse for decades to come.

This article is authored by Pawan Khatter, Partner and National Leader – Aerospace and Defence, EY India, with contributions from Prity Goyal and Gaurav Narula, Directors at EY India.