Guest Writer

MRO industry gears for growth

Investor enthusiasm is unabated as India's aviation industry gets set to open its doors to MRO facilities with the foreign direct investment limit extended to 100 per cent. By Neelam Mathews

India is a strong market to tap into and capture a sizeable share with high growth levels. Domestic and regional aircraft fleet is expected to have the strength of approximately 3,100 commercial aircraft by 2026. Aircraft utilisation has also risen commensurate with traffic.

It was at the recently-organised roundtable on MRO by McGraw Hill's Aviation Week in Mumbai that brought together airlines, regulators, service providers and suppliers in the commercial airline aircraft maintenance, repair and overhaul business with the sole purpose to initiate a dialogue on key issues common to all participants and identify possible solutions in light of the rapid expansion taking place in commercial aviation in India.

As an outgrowth of the roundtable discussions, a working forum on MRO called Action MRO Committee was formed that recently held its first meeting to move issues forward with the government in 2008.

The roundtable had animated discussions on challenges faced by India. As a net importer of MRO services with nine to 10 per cent growth in airframe capacity anticipated annually for the next few years, India would need to be ready to meet the growing demand and become a net exporter of MRO services. The roundtable participants proposed a number of strategies to resolve challenges of a growing industry with the active participation of the DGCA, joint director general (Airworthiness), RP Sahi.

The scope of MRO in India is vast with the market expected to grow by at least 10 per cent in the coming years, says a KPMG report. The advantages of setting up an MRO facility for commercial wide body aircraft in India include low labour costs - nearly 60 per cent lower than international standards.

Meanwhile, the biggest drawbacks of operating an MRO business in India at the moment is that certain government policies do not offer much clarity and this acts as the major hindrance in setting up a business in India. This, and the presence of high tax liability, especially import duties for aircraft spares.

A white paper presented by Aviation Week to the DGCA recently notes issues related to MRO in India that need urgent attention:

Findings and issues

• India's regulatory restrictions, statutory requirements and bureaucratic timelines prevent MROs from keeping pace with the growth of Indian aviation
• Minimisation of bureaucracy and speeding the regulatory process (including delay in extension of approvals and a large amount to be paid to the DGCA as administrative costs). Mechanisms to achieve this: Engaging technical experts from the industry to help in the regulatory process
• Training (lack of adequate personnel) and workforce (licensing of engineers, no alignment with international regulations)
• Access to land (close to airport land not designated for relevant development)
• Tax liabilities (lack of tax breaks, service tax, value-added tax)
• General aviation and scheduled aviation are treated differently
• Control of documents (procedures and work instructions), revisions (quality system issues)

Taxes hinder indigenous growth

Laws do not favour indigenous MRO third services provider growth. A major grouse has been customs duty on import of spares. Presently, the components required by the customer airline are mostly imported by the service providers. Import of aircraft parts into India is ordinarily chargeable to customs duty at the rate of 25.40 per cent. Exemption from payment of customs duty is available in case such parts are imported for servicing, repair and maintenance of the aircrafts for operating scheduled airlines or cargo services. While this exemption is available in case the imports are made by the airline operators, customs laws do not clarify as to whether this exemption would also be available in case of imports by independent MRO service providers.

In case repair, maintenance or servicing of an aircraft is undertaken in India, it is chargeable to service tax at the rate of 12.36 per cent. The MRO service provider would be able to claim CENVAT Credit on excise duty/service tax paid on inputs/input services. However, in case such repairs are undertaken outside India, service tax is not charged.

In addition, for pooling, the MRO service provider typically charges a fee for providing access of the parts contained in the pool to the customer airline. Such access fee is chargeable to VAT at the rates specified in the state where such pooling operations are being carried out. In case the repair of aircraft/aircraft engine is undertaken outside India, it would not be chargeable to any VAT in India. Says an analyst, "As can be seen, MRO activities attract multiple indirect taxes depending on the manner in which the transactions are undertaken. Given that MRO business in India is in its nascent state, there is lack of clarity on many of the tax issues and it is important to explore if there are avenues for bringing in tax efficiencies in the operations.

Recommendations from the white paper

• Follow example of IT industry for incentives and tax breaks
• Reduce disparity or taxes versus customs duties, which act as disincentives. Do away with stamp duty on commercial agreements
• Move toward tax-free imports to make indigenous industry competitive. (Participants referred to present policy as "reverse imperialism")
• Review land policy on MRO core activities. Airport planning must include 20 per cent of land allocation for MROs. Revenue share by airports is not acceptable and royalties are uncalled for
• DGCA clearances to be expedited for the following:

  * CAR 147 (training for organisations to do training in-house)
  * CAR 145 and rule 61 (an EASA for labour to enable MROs toward logical methodologies for work)

• Differential rule pattern for GA, civil, military MRO to be removed and industry treated as one
• DGCA should club all components or systems under various headings to enable single extension for the same product line to cut expenses of MROs
• MROs should be recognised on an equal footing as airlines for fringe benefits
• l Focus on workforce. The industry expressed concern for lack of adequately trained and knowledgeable people with practical ability and the need to improve existing industry training standards.

Changes spell progress

There are several regulations under revision. For example, CAR 145 is in the final stages of revision. Further, CAR 147 would mean many responsibilities of DGCA will be delegated to training organisations. Indian training institutes that will be established with CAR 147 will no doubt be in technical collaboration with international MROs. DGCA will delegate some of its functions, for instance, in examinations, as the industry is now mature enough to take the responsibility.

Reassuring words came from Sahi, "Our (DGCA) role is to see that the regulatory framework is in place as the MRO business is here to stay. It is our duty to see that the right kind of regulatory framework is there so that MROs are able to build their infrastructure. We have to be a global body and player. To that effect we are synchronising our regulations with international regulations. We have taken number of steps to ensure that we are ready for them once the MROs are ready to be established. All said and done, we will have a very good regulatory system in place by middle of 2008."