High taxes, customs duties and shortage of skilled manpower may hinder Civil Aviation Minister Praful Patel's ambitions of making India a global aircraft maintenance repair and overhaul hub.
The high tax regime makes aircraft service above 50 per cent more expensive than international rates and might spell trouble for over a dozen MRO projects -- several of them involving foreign direct investment that have been announced so far.
For instance, servicing an aircraft in India would entail service tax of 12.5 per cent (overseas MROs do not charge this). Importing spares involves customs duties of up to 50 per cent plus value added tax of 12.5 per cent and octroi of 4 per cent.
So, while a 'C check' (a half overhaul of the aircraft done every 18 months) on an Airbus A320 would cost around Rs 2 crore (Rs 20 million) abroad, the estimated servicing costs in India would be close to Rs 3 crore (Rs 30 million).
"No Indian MRO can absorb all these taxes, so the maintenance prices would increase immensely," said Bharat Malkani, chairman, Max Aerospace and Aviation, an MRO company.
The imposition of customs duties is particularly unusual because Indian airlines importing spares are exempt from them but not MRO companies.
"The tax structure is definitely a deterrent," said an executive with government-owned Air India, which is planning four MROs with Airbus and Boeing for airframes, engines, and other components.
Both Airbus and Boeing are investing $100 million each for the MRO projects.
Accenture is currently drawing up a business plan for Air India's MROs and the executive said the airline "will definitely take up the taxation issue with the government soon".
High taxes also more than offset any advantages that India gains in terms of labour costs, which are roughly 30 per cent lower than competing MRO hubs such as the ones in Singapore, Toulouse and Seattle.
"Labour costs would account for hardly 25 per cent of an MRO's costs whereas imported spare parts would account for 75 per cent. Even lower transportation costs that accrue from repairing the aircraft in the country rather than flying it abroad would mean nothing before the high taxes," said an aviation analyst.
India's labour advantage is also minimised on account of a significant skill shortage. "Because of this, MRO companies would have no other option but to get manpower from abroad," he added.
A full-fledged MRO needs 35,000 to 45,000 engineers.
The combined disadvantage of high tax and skill shortages is likely to be compounded by growing global competition.
"Apart from the high tax, there will be competition from the world's largest MRO hub being created in Dubai which has identified India as a key market" said Kapil Kaul CEO, Indian Subcontinent, Centre for Asia Pacific Aviation.
"Dubai could offer attractive rates," he pointed out.
Several Indian carriers, including Air India, Kingfisher, Jet Airways and IndiGo, have set up a lobbying body called Action MRO Committee. Set up last year, the committee gave its first representation on the various problems that MRO projects face last month.
The Federation of Indian Airlines, a domestic lobby, may also take up these issues with the aviation ministry soon.
