MROs limit the lease rate at 40% when it’s renewed

NEW DELHI: According to information obtained by Mint, India’s aviation maintenance, repair, and overhaul (MRO) units have requested a decrease in the rental prices at which the government renews their land leases.

“The industry has requested that the Ministry of Civil Aviation step in over lease rents for the MRO sector. A new land allocation from the Airports Authority of India (AAI) must be granted at 40% of the current land leasing rates for MRO firms, according to the guidelines. On the other hand, rates for lease renewals are increased, often surpassing 100% of current rates “An industry official spoke to Mint under anonymity.

As of right now, the ministry has set the highest feasible lease rate for maintenance, repair, and overhaul (MRO) businesses at 40% of the going cost when land is allocated via a tender.

The executive said, “The representatives of the industry want the lease rate to be capped at 40% at the time of renewal.” MRO firms are increasingly concerned about the high lease rates at airports like Mumbai, Delhi, Bengaluru, Hyderabad, and Mumbai.

According to industry insiders, leasing rents make up between 10% and 15% of an MRO unit’s yearly operating costs, depending on the airport’s location.

According to a spokesman for the civil aviation ministry, the MRO sector has brought up concerns about expensive lease prices. At AAI airports, leases are decided via a bidding procedure that involves two private parties: the MRO and the airport operator.

In FY20, rent and services made up 7.8% of AAI’s total income. This increased to 17.8% in FY21 as a result of interruptions caused by COVID-19, but it dropped to 4.3% in FY23 when the authority reported generating ₹12,172 crore in revenue.

India’s MRO market is still in its infancy. According to Deloitte, it was estimated to be worth $1.7 billion in 2021 and is projected to increase to $4 billion by 2031 at a compound annual growth rate of 8.9%, as opposed to the anticipated worldwide average of 5.6%.

The sector has also sent a letter to the ministry of Civil Aviation outlining the difficulties it faces due to high integrated goods and services tax (IGST) rates on certain commodities.

Although the GST rate on maintenance, repair, and overhaul services for aircraft, engines, and other aircraft components or parts was lowered from 18% to 5% in 2021, it was also stipulated that the accessories covered by MRO services could not be named differently. Interstate supply of goods and services are subject to an IGST tax, which is collected by the Center and then distributed to the participating states.

Because of this, several products—like paint, lubricants, and coffee makers—have a high IGST even though they are used in industries other than aviation. These components have high acquisition and maintenance costs in the aviation industry, which causes a significant difference in their cost structure compared to non-aviation businesses. A domestic coffee maker costs ₹5,000–10,000, but an airplane coffee maker might cost anywhere from ₹400,000–500,000. As a result, the sector pays 12–28% IGST instead of 5%,” said a senior executive of an MRO business.

As a result, the industry has asked the ministry of civil aviation to start talking to other relevant ministries about classifying these commercially utilized aviation-related commodities and offering IGST reduction.

A spokesman for the civil aviation ministry said Mint that as the GST Council decides on IGST matters, the nomenclature problem for classifying aircraft components under HSN Code 88 or relating to aircraft, spacecraft, and parts thereof has been officially brought up with the ministry of finance.

When compared to other cost components like labor, the price of spares and components makes up a much bigger portion of the total. Therefore, MRO companies have been concerned about the limited GST savings on parts and components. To stimulate airplane maintenance operations, no airline will be prepared to pay 20% more in taxes than other travel destinations like Dubai and Singapore, which provide zero tax structures and tax breaks for 10 years, respectively, according to a Niti Aayog study.