Flight Plan

Invest more in MRO

Saurabh Agarwal | Updated on February 07, 2021

Saurabh Agarwal

Saurabh Agarwal, Partner, Indirect Taxes, EY, on making India self-reliant

What tax changes can help Bharat become atmanirbhar in the MRO (Maintenance, Repair and Overhaul) industry? In the current pandemic, the aviation sector has been one of the most affected. In spite of all odds, it is expected that India will become the third largest aviation market in the world by 2024.

To cater to growing demands, the government continues to invest in the development of new airports by way of public-private participation. However, one such area where not much investment has been seen is in the MRO sector.

Despite locational advantages and a huge demand in the country itself, the MRO business continues to be centralised in three countries in the Asian market — that is, Singapore, Malaysia and Thailand.

Typically, MRO spends constitute 12-15 per cent of the expenditure for an airline, which is the second-highest spend after fuel cost for airlines. A majority of the said spend made by domestic carriers results in a foreign exchange outgo for the country.

The government has been trying to liberalise its tax and regulatory policies to localise MRO facilities in India. However, not much has been achieved so far. One such key step taken by the government in the recent past has been a rationalisation of GST rate on MRO services from 18 per cent to 5 per cent effective April 1, 2020. However, many uncertainties around the taxation structure, especially in the area of GST, continue to act as a deterrent for investment into the industry.

There are two issues which are worth consideration by the government to bring in the certainty of taxes or help in reducing costs for the Indian MRO operators.

While a decrease in the rate of GST on MRO services has been a welcome measure, no corresponding change in the GST rates on the input leg (i.e, 5 per cent, 12 per cent, 18 per cent or 28 per cent) will lead to a working capital blockage on account of the inverted duty structure. Though the refund of GST paid on inputs will be available to the Indian MRO operator, the cash flow blockage is likely to result in an increased cost of operations for the industry.

Another such issue warranting a clarification has been the rate of GST to be applied on the composite supply of goods and services by an MRO operator — where the intent of the airline is to avail the MRO services while the said supply may have a higher value of parts embedded into the same compared to the value of services. This, in turn, is likely to cause a debate whether the said MRO services will constitute a supply of goods or service for the purpose of taxability under the GST legislation.

A clarification or amendment if introduced by the government on the aforesaid key business issues is likely to help in the localisation of MRO operations in India. This, in turn, will help the industry realise the dream of our Prime Minister to make Bharat atmanirbhar.

Published on February 07, 2021

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