With all the steps in the right direction, a few roadblocks still need to be addressed
Background
The Maintenance, Repair and Overhaul (MRO) industry plays a crucial role in ensuring the safety and efficiency of aircraft and vessels. With the recently announced mega orders for aircraft by Indigo and Air India, India is poised to become the third largest buyer of commercial planes after the US and China. As per the Niti Aayog report, the airlines in India spend about 12% to 15% of their revenue on maintenance, the second highest cost for airlines after aviation fuel, and taxes, including GST, play a significant role in controlling operational costs.
Prohibitive tax restricted growth of the sector
Whereas the tax on MRO services stood at NIL in Sri Lanka and 7% in Singapore & Malaysia, the tax rate in India for MRO services in relation to ships and vessels faced a high rate of 18% till June 2021. Services in relation to aircraft, however, were put in a favourable 5% bracket. In addition to the non-competitive rate, prior to April 2020, even the levy of GST was based on the performance of such services, and as such, even overseas shipping and aviation companies were suffering tax on services received in India. Since this was an Indian tax, no credit of the same was permitted to them in their home country and it became a permanent cost to them, adding to their cost of operations and ultimately, increasing the revenue pricing to end-customers.
Bringing in a competitive tax regime
Realising the policy impact on the growth of the sector, and taking note of the enormous opportunity for the country, not just in terms of employment, but also revenue generation, the GST reforms on the sector were brought in. The tax rate on MRO services for ships and vessels was brought at par with that of aircraft at 5%, reducing the tax impact by 13%. The government also took cognizance of the place of supply provisions for such services, and appropriate changes were made to tax the MRO services based on the location of the service recipient. This change was brought in March 2020 for services in respect of aircraft, aircraft engines, and other components, and in June 2021 for services in respect of ships and other vessels, their engines, and other components.
A level playing field
Deputy Manager,
ASA & Associates LLP
With these changes, the GST regime in India on the MRO sector stands at par with many other countries, in fact, rather favourably as compared to some. While Singapore continues to be the South Asian hub for MRO activities, with the growth in the aviation sector in India, and the highly competitive tax regime now, the MRO sector is expected to see catapulting growth in India. With the change in the place of supply provisions, now MRO services to overseas corporations will be treated as zero-rated, reducing the cost of operations for them. Other government policies are also in line, including extending the duty-free component imports for three years, amongst others.
Challenges remain
With all the steps in the right direction, a few roadblocks still need to be addressed. The age-old problem of classification and application of appropriate tax rates continues to plague the system, especially in the area of raw materials used in the MRO sector, viz. specialty steel, nickel-based alloys, and aerospace grade aluminium, to name a few. As these are taxed at a higher rate, it affects competitiveness negatively. Similarly, at the time of importation, various components which are used in aircraft/vessels, also have non-MRO sector usage. And this leads to a nomenclature-based anomaly in the taxation of imports. Duty exemptions on imports and an inverted duty structure too, make the shift to domestic manufacturing difficult and costly.
Conclusion
Partner,
ASA & Associates LLP
To make India a truly global hub of MRO operations, a multi-pronged approach will need to be followed. A simpler and unambiguous classification structure for HSN codes, promoting domestic manufacturing through rationalization of inverted tax structures, attracting investment by means of Production Linked Incentive schemes, and establishing a world-class skill base with human capital development – all these will enable the objective, substantially add to our growing economy and boost infrastructure capabilities of India, positioning us as the preferred country for MRO operations.
