Bangalore/Mumbai: A proposed joint venture between state-run aircraft manufacturer Hindustan Aeronautics Ltd (HAL) and Canada’s Pratt and Whitney to maintain and repair plane engines has been put on hold because of concerns over taxes to be levied on spares and services.
No take-off: Dhruv helicopters displayed at HAL’s helicopter division in Bangalore. HAL’s planned MRO unit with aircraft engine maker Pratt and Whitney has now been put on hold.
HAL had planned the equally owned joint venture with aircraft engine maker Pratt and Whitney, which is owned by US conglomerate United Technologies Corp., for setting up a maintenance, repair and overhaul (MRO) unit in Bangalore for engines that power executive jets and turboprop planes flying shorter routes.
Higher import duties and additional service tax would increase the cost of such a venture by half, an HAL official said, requesting anonymity. Imported spares attract a customs duty of 34.13% and the service tax on the value of the repair service is 12.36%.
A Pratt and Whitney spokesperson, however, maintained that talks were still on and that tax regulations were not a concern at this point in time. The company did not specify a time frame for the venture to start.
“It is not for HAL-Pratt and Whitney, the tax structure is going to impact all MRO companies operating in India. The service tax, octroi and value-added tax are virtually killing the MRO industry,” said Bharat Malkani, chairman of Mumbai-based MRO firm Max Aerospace and Aviation Ltd.
Malkani said his firm could not take high-value orders because of the tax structure. “The more the value of the orders, more the tax portion. This will drive away the MRO companies from India,” he added.
India is emerging as a hub for aircraft makers and repair firms to set up units. Boeing Co. and Airbus SAS are setting up two MRO units and GMR Infrastructure Ltd, which will operate the airport it is building in Hyderabad, also plans to start an MRO unit with Germany’s Lufthansa Technik AG. Bangalore’s Taneja Aerospace and Aviation Ltd is setting up a facility that will initially repair smaller and regional jets.
India’s MRO market opportunity for engines, airframes and components is estimated to grow to $1.17 billion (Rs4,645 crore) in 2010 and to $2.6 billion by 2020, according to a May 2006 report of the Aeronautical Society of India (AeSI). It would cost $40-60 million to set up an engine MRO unit, the report said.
Analysts say the higher duties may cripple the companies involved in MRO business, even though it is a critical support for civil aviation growth.
“The high duty structure and cost (for real estate) virtually nullifies the business prospects (of an MRO unit) in India,” said an analyst who tracks the aviation industry with an international brokerage in Mumbai. He did not want to be named as he was not authorized to speak to the media.
Satya Poddar, a partner on tax affairs at audit firm Ernst and Young in Gurgaon, outside New Delhi, said that only those services for airlines that fly on international routes could gain credit on service taxes. “For those who work for aircraft that fly on domestic routes, they are stuck,” he said.
But Y.S. Shashidhar, vice-president, industrial technologies practice, with consulting firm Frost and Sullivan, said: “Before reaching a decision that existing tax structure kills Indian MRO companies, one would also look at comparative cost savings in labour and the cost for taking an Indian plane or engine to get repaired in Singapore or Dubai.”