The change in the tax structure for services relating to the maintenance of aircraft and engines was announced earlier this year; this was reiterated in the Finance Ministers economic package announced to help the economy. These services referred to as Aircraft Maintenance Repair and Overhaul (MRO) services are critical in the aviation industry value chain. The change in the tax reforms by Govt addresses the capital loss because of the majority of maintenance work done overseas. The announcement made by Sithraman ji as a part of fourth tranche of stimulus measures to boost up economy post Covid pandemic. She said,” Not just civil aircraft but defense aircraft can also benefit from the MRO if we make India a hub. Maintenance cost for airlines will go down and that will again ripple the passengers. Travelers can probably pay less after that”.
What New Figures have to say
1. The government adjusted the rates of MRO to 5% from 18% via a notification on 25th March 2020.
2. Giving Indian MROs a full Input Tax Credit (ITC).
3. Location of setting up an MRO should be as per convenience of the recipient.
Current MRO Scenario in India
The INDIAN MRO industry was worth USD 800 MILLION in 2011 and is expected to grow up to USD 3 BILLION by 2023 in accordance with 8.7 BILLION from the ASIA PACIFIC with about 1000 jets registered in India according to Airbus data. However, currently India shares only 1 percent of the global MRO market share. NORTH AMERICA being the top on the list shares 10% and Singapore 3%. More than 100 MRO facilities are located in Singapore giving them a return of USD 5 BILLION in 2011. Singapore recorded a 90% revenue share from MRO itself.
Airlines in India spend about 13 to 15 percent of their revenues towards maintaining their aircraft. Airlines generally carry ON-tarmac (A and B) checks in house and work with third parties for heavy (C and D) checks - heavy maintenance and modifications. Almost all airlines MRO infra in INDIA is captive with AIR INDIA which is a fully operational independent 3rd party provider with their facility at Nagpur. Air Works, an EASA certified facility in Hosur, near Bengaluru provides heavy maintenance for AIRBUS A320, ATR 72/42, and BOEING 737/NG aircraft and other 50 different types of aircraft. GMR in partnership with MAS has an operational facility at HYD. Till recently in absence of these facilities Indian aircraft mostly carried out maintenance outside India (MIDDLE EAST and FAR EAST ASIA). India lost almost 90,000 jobs to Sri Lanka, Middle East, Asia-Pacific and Singapore which can be brought back to India by correcting and realizing the challenges faced by MROs in India. Indian engineering is amongst the best in the world and its industry requisites expertise to undertake MRO in India. India can become a MRO hub in Asia if given a scale of technical capabilities and expertise.
Challenges Faced by Indian MRO Industry
Indian MRO players were suffering from higher tax nearly 40% greater than foreign MROs. The introduction of Goods and Service tax (GST) placed Indian MROs on a disadvantageous position where the GST levied was 18%. The tax disparity led 90% of the maintenance work to be given to foreign destinations and companies. ”THE VISION 2040” document by the Federations of Indian Chambers and Commerce of Industry (FICCI) showcased the massive flow of foreign exchange of MRO services to MoCA. The GST tax Anomalies were then corrected providing domestic MROs an equal opportunity which was essential for their survival. Also the remarks of Oliver Andries, French CEO of Safran Aircraft Engine to the Defense Minister Rajnath Singh ji in OCT 2019 mentioned their keen interest in setting up a strong maintenance and repair base in India only if India would improvise their tax policies created a huge buzz around. Despite of allowing 100% FDI in MRO industry no foreign investors wished to set up base in India only because of inevitable tax and custom systems of the country.
In spite of tax rationalizations, other issues remain pending for the MRO industry. Key amongst these is Airport Royalty exemption for MRO industries at various airports in India which was clearly stated in country’s Civil Aviation Policy (NCAP) 2016. As per the policy, airports to refrain from a levy of royalty and additional charges on MRO service providers for a period of 5 years of date. The intent on the policy was to boost up the MRO service provider to gain volume and be able to afford to pay after in 5 years. Yet AAI let charging these charges for MRO providers under a different classification such as ground handling charges, revenue share charge, and demurrage charges which range from 11 to 20 per cent.
Location of the MRO being a second challenge where the maximum cargo flowing in and out of Metros, limitations of space at metro airports was a task for the service providers. Ideally MRO was to be co located at an airport, but as per 2020 reforms for MRO the location was as per convenience of the recipient.
Lastly there is an outstanding issue of certification of workers. Due to a regulatory misalignment, aircraft technicians who are able to service the aircraft overseas are forced to take exam for certification of the same in India. This in spite of same amount of practical experience or in many cases extensive practical experience. Effectively this not only increases time for hiring and releasing them to duty but also deters folks from returning back to India. The provision of CAR 66 dealing with Licensing of Aircraft Maintenance technicians need to be reviewed to provide Indian industry with an equal playing field by aligning the DGCA CAR with that of FAA and EASA.
MRO facilities in India, with the corrections in tax reforms and tax anomalies has potential to enable airlines operating in India to achieve a faster turnaround time, savings in operating costs and reduce foreign exchange outflows. This will help Indian MRO services to get businesses form neighbouring countries as well as from INDIA. This will boost up MSME sectors and provide jobs for technical workforce eventually helping the sector. With new reforms, Indian MROs have been able to see a light at the end of the tunnel. As these issues are gradually addressed, MROs in India may finally Take-off. Enrol below for Udaan Aviation Academy's pioneering course on Airline Maintenance Management delivered by Industry Veteran from the field of Aircraft Maintenance.