Air Works India forms JV to start MRO services in Nepal

New Delhi: High taxes on maintenance, repair and overhaul (MRO) activities in India has made Air Works India Engineering focus on growing international business. The company has formed a joint-venture with Nepal-based Yaksa Investment, 'Air Works Nepal', which will provide aviation maintenance services to international airlines and domestic operators from Tribhuvan International Airport, Kathmandu. Air Works India is also exploring possibilities to start to satellite line maintenance stations in Myanmar and Bhutan over the next few years.

Sanjeev Munjal, vice-president (strategy and M&A), Air Works India Engineering Pvt Ltd, said, "The commencement of operations in Nepal in is line with our overall expansion plans to start aviation engineering services' ventures in neighbouring countries where availability and quality of MRO services is not up to international standards. We are also examining possibilities to start operations in Myanmar and Bhutan."

While Air Works will extend its technical capabilities from India to facilitate operations in Kathmandu, Yaksa Investment will secure clearances from local regulatory authorities. Air Works will provide line maintenance services on ATR 42/72, Airbus 320/330 and Boeing 737/777/787. Commercial operations in Nepal are expected to commence by March/April 2015.

High taxes on MRO services have made it unviable for MRO companies to operate in India. The central government levies service tax of 12.36 per cent on MRO services; royalty payable at airports range between 13-20 per cent.

Vivek N Gour, managing director, Air Works India Engineering Pvt Ltd, said, "It is difficult for a private company to get land at an airport in India. Apart from that, MRO services attract service tax of 12.36 per cent. Annual checks for a narrow-body aircraft cost around Rs 1-1.5 crore, on which service tax amounts to Rs 12-18 lakh. To service an entire fleet at these rates turn out to be expensive for airlines, which are already cash-strapped because of high ATF costs, airport charges in India. They find it cheaper to go to Sri Lanka, Singapore or Dubai."

To offset risks, Air Works India has already diversified business geographically. As much as 75 per cent of its revenues come from international business currently (mostly from United Arab Emirates, France and United Kingdom) as compared to none seven years back.

The MRO in the country is currently estimated at $ 700 million, but only 5-10 per cent of this business is carried out within the country. Indian carriers today prefer to get their fleet serviced in places like Colombo, Singapore, Malaysia and Dubai due to the prevalent tax structure in the country, which makes MRO operations up to 30 per cent costlier. MRO companies have to pay taxes to the extent of 40 per cent for providing services in India. The industry is projected to double in size to clock business of $ 1-1.5 billion by 2020.

Earlier in March this year, the ministry of civil aviation had readied for public consultation a draft policy looking at offering fiscal incentives to the heavily taxed MRO sector. The policy aimed at creating a level-playing field by giving tax exemptions to the MRO industry in India - the central government would have to give custom and service tax exemptions, whereas, the states would provide exemptions from value added taxes, octroi. The new government has also said that it would take requisite steps to boost the MRO industry in India in the draft civil aviation policy unveiled earlier this month.

Rajesh Bali, secretary, Business Aircraft Operators' Association (BAOA) said, "Due to its geographical position, India can be leveraged as a hub for MRO operations. But the tax structure in the country is such that even Indian carriers today find it cheaper to fly their aircraft overseas for service and repair." The financial stress in the industry has even made players like GMR to to look at selling its stake in the aircraft maintenance facility it jointly owns with Malaysian Aerospace Engineering Sdn Bhd, the Hyderabad-based MAS GMR Aero Technic Ltd, added another industry insider.

"MRO is a near $ 1 billion opportunity that has been gifted away by India to its neighbours. Today, Indian carriers are forced to fly empty aircrafts and crew abroad, pay in foreign currency and then fly the aircraft back after repairs. A colossal loss of revenue, fuel, foreign exchange and Indian jobs. This needs to be reversed on priority. Key reasons include a huge tax disadvantage, cumbersome customs and security procedures, high airport charges and lack of inter-ministerial and inter-agency cooperation. These problems are man-made and hence surmountable", said Amber Dubey, Partner and India Head of Aerospace and Defense at global consultancy KPMG. Making the Indian MRO industry competitive will not just help airlines save on costs of sending their aircraft abroad for repair but also generate employment in the country.

The Indian government in recent times has been trying to address the concerns of the MRO industry in India by offering a waiver in customs duty for import of spares and testing equipments.

In the union budget in 2012-13, the then finance minister Pranab Mukherjee had waivered customs duty for import of spares and testing equipment by MROs. However, the duty waiver could be availed only if the spares were utilised in three months. In the union budget presented for 2013-14, finance minister P Chidambaram modified that condition by extending the duty waiver period to a year.

Dubey added, "With the Indian fleet size expected to double by 2020, the need to build a robust MRO industry in India is critical. We need to have a zero-rate of indirect taxes like import duty (currently limited to a 12 month period), Service Tax, VAT and Octroi (where applicable). Customs and security procedures need to be liberalised, airport charges need to be drastically reduced, and MRO training facilities need to be developed on a PPP basis."

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.