Higher GST barrier for local MRO industry


Pushed to the brink due to a skewed tax policy, domestic aircraft maintenance, repair and overhaul (MRO) players are aggressively lobbying with the government to create a level playing field for them against their foreign counterparts.

Bharat Malkani, president, MRO Association of India (MAOI), told DNA Money that India was losing close to 90% or $1.4 billion (FY18) of MRO business to overseas players due to discriminatory levies.

According to him, while there was a goods and services tax (GST) of 18% on domestic MRO services, the customs duty on imported MRO was just 5%. He said such a discriminatory tax regime was making domestic MRO companies less competitive against their foreign rivals.

“Indian MRO companies are shutting down because they are not able to fairly compete with overseas players because of discriminatory taxes, which has put them at a cost disadvantage. We are paying 18% GST on sale price while overseas players are paying 5% at cost price. So, the gap is effectively around 21-22%,” he said.

Malkani said the difference in levies between domestic imported MRO services was roughly 13%. This made it more cost-effective for local airlines to send their aircraft to markets like Singapore, Sri Lanka, Dubai, Malaysia, Middle East, Germany and other countries for maintenance checks.

“We (MAOI) don’t want concession or subsidies. We want a level playing field. If 18% is my GST, you (government) put an 18-20% duty on imports. (US President Donald) Trump is imposing a tariff for protecting domestic industry. Here, we are trying to protect a foreign industry by giving it a subsidy of 13%,” he lamented.

Ravi S Menon, executive director of Air Works India Engineering Private Limited, said massive investments have been made by the domestic MRO industry in infrastructure, manpower and tooling, but the high GST is threatening to wash it away.

“It’s taken a lot in terms of investment, infrastructure, material, training of manpower, investment in tooling and all of that. Today, we are ready to undertake the base maintenance checks on narrow-body aircraft, including Airbus 320 family, Boeing 737 family, the ATR-72s and the Q400s. It primarily became a credibility and trust-building approach with the airlines in India, with us telling them that we have the necessary skill sets, competencies to undertake the base maintenance checks very effectively. While all this was in the process, GST got introduced and it has put us at a disadvantage position with foreign players,” he said.

Menon feels that the existing framework of levies was penalising local players and incentivising overseas players by giving them a cost edge. Before GST was launched, service tax and value-added tax (VAT) was being levied on MRO. The Maharashtra government had waved off the VAT to promote its growth.

“We are being penalised and the region (Sri Lanka, Middle East, Malaysia, Germany, Singapore and others) is being incentivised. Our demand is to make it a level playing field and take it one step further to incentivise India’s growth and development of MRO services. Perhaps, give a GST break or a GST waiver for first five or 10 years to allow the MRO industry to stabilise so that it becomes sustainable for the future,” he said.

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India’s MRO is still a fledgeling industry. Before the government began the privatisation effort in 1993-94, Air India had an in-house MRO capability. It was only after private airlines like East West and Damania were launched that airlines started sending aircraft abroad for maintenance checks.

Malkani said from around 4-6 planes that went overseas for checks in the nineties, India’s total fleet has grown to over 590 aircraft, and is expected to scale up to 1,200 aircraft in the next six years.

“We are now looking at MRO import bill of $3 billion in the next six years. There is something fundamentally wrong with our policy. How can you ignore the Indian industry? If we are price-insensitive, the industry will automatically cease to exist. Giving subsidy to foreigners to do work in India is unheard of any other industry,” said a livid Malkani.

Today, less than 10% of the domestic MRO business is with local players. Among the major players in India are Air Works, GMR Aero Technic and Max Aerospace and Aviation Pvt Ltd, which specialise in general aviation, transport and engines and components, respectively.

“For the first time, MRO companies are shrinking their revenues because we are getting contracts from airline customers saying can you match it up. We say, how can we. If it was only labour we might have absorbed 4-5% cost but 18% on spares is tough. We don’t manufacture spares and Boeing and Airbus are not going to give me 18% discount,” said the MRO lobby body chief.

Malkani said MRO service was zero-rated in countries like Sri Lanka, Singapore, Germany, Dubai and others, where Indian airlines send their planes for maintenance checks.

He argued if the government charged an import duty of 20%, they could earn close to $200 million on 90% of the $1.4 billion MRO revenues. Today, it was earning barely $10 million on less than 10% of the total MRO revenues from domestic players.

According to him, over the last one year more than 35% of the domestic MRO firms have shut down operations, and if some corrective step was not taken urgently it would sound the death knell for the entire industry.

“We have estimated that more than 35% of the players have shut down operations over the last one year, mostly smaller ones. The bigger ones are also ready to shut down. If you look at their balance sheet, it is sad. Once they shut down, there’ll be no impact, apart from a loss of job to 20,000 of us, which is insignificant in a population of 1.3 billion people. Imports will continue like it is now,” said Malkani.

He pointed out that despite the government allowing 100% foreign direct investment (FDI) for MRO, not a single FDI has flown in. A few like Lufthansa Technik Services India and others made a hasty retreat on realising that it was difficult to make money in India.

According to him, India’s import-driven policy had led to 90,000 direct jobs being lost to countries like Sri Lanka, Singapore, Thailand, France and Germany.

“These jobs can easily be brought back to India by correcting the fiscal tax imbalance that has affected this industry since independence. Indian engineering is among the best in the world and allowing this drain of precious skill and forex to foreign locations is unwarranted,” he said.

An airline official, who spoke off the record, told DNA Money that while the decision on which MRO to choose was mainly driven by cost, it was also based on the availability of parts and level of overhaul needed for the aircraft.

“We do some checks in India but it works out cost-effective to send our planes to an MRO abroad,” he said.

Source : https://www.dnaindia.com/business/report-higher-gst-barrier-for-local-mro-industry-2694983

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