Big Policy Corrective: Aero MRO gets a lifeline with a big tax cut from 18% to 5%

Amidst the gloom in the Aviation Industry because of the global Coronavirus crisis, there's some good news. The MRO segment of the Industry is set to get a shot in the arm with the Government finally conceding a long-awaited policy corrective by reducing the applicable GST rate from 18 per cent to 5 per cent with full input tax credit, and treating MRO services provided to a foreign recipient in India as export.

These decisions were taken in the 39th GST Council Meeting held on March 14. The notification is expected to be issued soon and the new tax regime for MRO is likely to be effective from April 1, 2020.

The earlier rate of 18 per cent GST for MRO services rendered in India as against just 5 per cent IGST for availing this service abroad had crippled the domestic MRO industry and curiously incentivised "import". Against an Indian tax rate of 18 per cent, Sri Lanka's is Zero while Malaysia and Singapore charge 7 per cent for aero MRO

The earlier rate of 18 per cent GST for MRO services rendered in India as against just 5 per cent IGST for availing this service abroad had crippled the domestic MRO industry and curiously incentivised "import". Against an Indian tax rate of 18 per cent, Sri Lanka's is Zero while Malaysia and Singapore charge 7 per cent for aero MRO.

Crippling taxation had imposed a glaring contradiction on the world's fastest growing aviation market: A share of just 1 per cent in the $81.9 Billion aero MRO business worldwide.

This also left India's aviation industry overwhelmingly dependent on foreign MRO service providers, creating a glaring vulnerability in a key sector even as it's preparing for the next wave of growth, with its aircraft fleet expected to almost double to over 1,000 aircraft by 2024.

Crippling taxation had imposed a glaring contradiction on the world's fastest growing aviation market: A share of just 1 per cent in the $81.9 Billion aero MRO business worldwide

Input GST paid on MRO at 18 per cent was much higher than the GST applicable to airlines at 5 per cent on output services, thereby making the cost of 13 per cent unrecoverable. What crushed the business even further were restrictions on GST credit to domestic airlines like ineligibility for credit on (input) GST paid on goods.

The other key decision in giving Indian Industry a level playing field was to eliminate tax on MRO services rendered in India to foreign airlines, upon such services now being recognised as export. The GST Council has decided that the location of the recipient for B2B MRO services shall henceforth be considered as the place of supply.

Earlier, the tax rate was a staggering 18 per cent, because the tax man considered the place of delivery of service as India, and hence, treated MRO service to foreign operators as domestic trade. MRO will also be eligible for refund of input GST.

This will also undo other aberrations and the incidence of double taxation pointed out by Industry representatives. For instance, work sub-contracted by foreign MROs engaged by airline operators to Indian companies has so far is subjected to a second round of 18 per cent taxation after the entire charge for the "import of service" has been subjected to IGST.

Bharat Malkani, president of the Association, hailed the move by the GST Council as a far reaching decision. "This will bring the MRO business to India. At the moment, Indian airline operators get only 5 per cent of their MRO work done in India because of the adverse taxation skew in practice so far. With this step, the Government has recognised a 95 per cent growth opportunity in this segment. We can now expect high growth rates. This will also lead to a creation of 70,000 to 100,000 new jobs in the next five years," remarked Malkani

The policy relief is a big win for the MRO Association of India, which has long been campaigning for tax equality and a level playing field and a reversal of the import incentive. Bharat Malkani, president of the Association, hailed the move by the GST Council as a far reaching decision. "This will bring the MRO business to India. At the moment, Indian airline operators get only 5 per cent of their MRO work done in India because of the adverse taxation skew in practice so far. With this step, the Government has recognised a 95 per cent growth opportunity in this segment. We can now expect high growth rates. This will also lead to a creation of 70,000 to 100,000 new jobs in the next five years," remarked Malkani.

He had earlier warned that the Industry would shut down in two years if a policy corrective was not taken. Thirty per cent of Indian MROs have shut down in the last few years.