Impact of GST on the Indian MRO Industry

Unless appropriate steps are taken urgently by the Government to rationalise the tax structure, it would sound the death knell for the entire domestic MRO industry in India

Issue: 02-2019By B.K. PandeyPhoto(s): By Air Works
The single factor that has had an extremely deleterious impact on the growth and well being of the MRO industry in India is the introduction of the Goods and Service Tax (GST)

Maintenance, Repair and Overhaul (MRO) of aircraft taken together as a combined support activity, constitutes an essential and indispensable component of the system that is necessary for the upkeep of the fleet of civil aircraft, be it an airliner or a fixed wing or a rotary wing platform in the domain of business and general aviation. It is a system and a process inherent to the civil aviation industry that ensures airworthiness of an aircraft and provides for high levels of air safety. Any short coming or deficiency in the MRO industry in the domain of civil aviation in the country, can lead to disastrous consequences for the aircraft as well as for those on board.

The Government has taken a number of steps in the recent years to introduce reforms in the Indian civil aviation industry, one significant one being the launch of the Regional Connectivity Scheme called UDAN. This scheme will lead to operationalising a large number of regional airports in the interior and remote areas of the country to enhance regional connectivity. With the implementation of this scheme, the Indian civil aviation industry as a whole has received the much needed impetus.

MRO INDUSTRY IN INDIA

India is the fastest growing civil aviation market in the world. As per Ravi Menon, Vice President, MAOI, “The Indian civil aviation industry is in the midst of a boom with a consistent annual growth rate at 20 per cent for the last few years. Based on data from the original equipment manufacturers (OEMs), the current fleet of 550 airliners is expected to grow to 1,000 by 2023.” The high rate of growth in the Indian civil aviation industry in turn, is expected to have a positive impact on the MRO industry in India. Currently, the MRO industry in the country constitutes just one per cent of the global market in this regime and is valued at around 31,500 crore. The assessed value of the market for MRO in India which in the year 2011, stood at approximately 5,600 crore, as per forecast by analysts, is expected to nearly double by 2020. However, rather unfortunately, it appears that this highly optimistic prediction of the target for 2020 is unlikely to be achieved in the time frame stated on account of some developments in the recent past. The single factor that has had an extremely deleterious impact on the growth and well being of the MRO industry in India and threatens even its survival in the future, is the introduction by the Government of India of the Goods and Service Tax (GST) on September 8, 2016.

Indian domestic carriers prefer to fly their aircraft to avail of MRO services to countries where MRO services are available without the burden of heavy taxation

Establishing an MRO facility is no simple task. First of all, the exercise requires heavy capital investment and the return on the investment made is not available quickly as it takes a long time to start flowing in. Apart from the problems in setting up the infrastructure itself, an MRO facility requires highly qualified manpower with the appropriate knowledge, skills and expertise that needs constant updating through regular training. An MRO facility is not only required to meet with demands of time lines, but requires continuous investment in tooling and upgrades. The MRO venture needs to have a strong focus on the quality of work output, is required to achieve and maintain global standards of excellence as also aim to achieve the ultimate objective of air safety. But perhaps the most challenging as well as daunting task before those who own and operate the MRO venture, is to obtain certification from the concerned regulatory authority as well as to maintain its validity through periodic inspection and renewal.

AN ESCALATING CRISIS

Unable to reconcile with the disturbing slowdown in the MRO industry in India, towards the end of November 2018, the MRO Association of India (MAOI) despatched a written communication to the Ministry of Civil Aviation (MoCA) highlighting the critical state the MRO industry in India has descended into today. As per the letter from the MAOI to the MoCA, troubles for the MRO industry in India began soon after the introduction of GST and thereafter, the problem has rapidly escalated into a crisis situation. In his letter to the MoCA, Bharat Malkani, the President of MAOI stated, “The Indian MRO business has been on a gradual decline and for the first time in history, it has registered negative growth this year. We cannot stress enough on the plight of our industry and are hoping for intervention by the Government before it is too late.”

As per Bharat Malkani, the President of MAOI, MRO services by the Indian companies are required to shell out GST at the rate of 18 per cent on domestic MRO services whereas imported MRO services were levied a mere five per cent of customs duty and are not required to pay GST.

Indian domestic carriers prefer to fly their aircraft to avail of MRO services to countries in the region such as Singapore, Sri Lanka, Malaysia, Dubai and China where MRO services are available without the burden of heavy taxation. In Singapore and Malaysia, GST is levied at seven per cent whereas in Sri Lanka there is no such tax levied on the MRO industry. The tax regime imposed by the Government of India is clearly illogical and highly discriminatory rendering the domestic MRO companies incapable of competing against their foreign rivals.

THE INDIAN MRO BUSINESS HAS BEEN ON A GRADUAL DECLINE AND FOR THE FIRST TIME IN HISTORY, IT HAS REGISTERED NEGATIVE GROWTH THIS YEAR

As per the President MAOI, “On Account of the highly discriminatory tax regime after the introduction of GST, Indian MRO companies are shutting down because they are finding it difficult if not impossible to compete with overseas players as they have been pushed into a situation of serious cost disadvantage”. The net effect of the discriminatory tax regime is that India is losing close to 90 per cent of MRO business to the firms in this business located overseas. Also, even though the Government of India had increased the limit of foreign direct investment to 100 per cent in the MRO segment of the civil aviation industry, there were no takers of this offer amongst the companies abroad. This is not surprising as foreign companies operating into India from abroad stand to gain on account of the substantially lower tax rates applicable to them than they would have to bear if these companies invested in India and operated as Indian MRO service providers.

URGENT NEED FOR CORRECTIVE ACTION

The MRO industry in India is still trying to find its feet. With around 550 aircraft being operated by the airline industry in India, the value of the MRO industry currently is estimated to be around 6300 crore. And with the fleet of airliners expected to increase to more than 1000 in a few years as also the significant increase in the size of the fleet of business aviation aircraft, the value of the MRO industry has the potential to grow substantially. However, faced with the possibility of complete failure of the MRO industry staring in their face, the major players on the scene have approached the Government with a desperate plea to create a level playing field to give them a chance to compete against their rivals from abroad and enable them to survive. They have suggested that as a first step, the Government of India consider waiver of GST for up to ten years to allow the MRO industry in India to stabilise so that it becomes sustainable for the future.

Over the past one year, more than 35 per cent of the firms in the domestic MRO industry have had to shut down operations. Unless appropriate steps are taken urgently by the Government to rationalise the tax structure, it would sound the death knell for the entire domestic MRO industry in India.