Boost to the Domestic MRO Industry

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Context

• The Government has introduced a uniform rate of 5% Integrated Goods and Services Tax (IGST) on imports of aircraft parts, components, testing equipment, tools, and tool-kits.

 Details

• This rate of 5% applies regardless of the Harmonized System of Nomenclature (HSN) classification, subject to specific conditions.
• This is a significant development for the domestic Maintenance, Repair, and Overhaul (MRO) industry and the aviation sector.
• This policy change aims to enhance the competitiveness of the Indian MRO sector, drive innovation and efficiency, and contribute to the growth of a robust and efficient aviation sector.

 Government Measures to Support MRO Services in India

Union Budget 2024-25 Announcements

• Extended Export Period: The period for exporting goods imported for repairs has been extended from six months to one year.
• Extended Re-import Time-limit: The time-limit for re-importing goods for repairs under warranty has been extended from three years to five years.

New MRO Guidelines (Effective 1st September 2021)

• Abolishment of Royalties: The new guidelines abolish royalties associated with MRO services.
• Transparency in Land Allotments: There is an increase in transparency and certainty in the allotment of land for MROs at Airports Authority of India (AAI) airports.

GST Reduction

• Reduced GST Rate: The Goods and Services Tax (GST) on MRO services has been reduced from 18% to 5%, with full Input Tax Credit available, effective from 1st April 2020.

Zero-Rated GST on Sub-Contracted Transactions

• Zero-Rated GST: Transactions subcontracted by foreign original equipment manufacturers (OEMs) or MROs to domestic MROs are classified as 'exports' and are subject to zero-rated GST, effective from 1st April 2020.

Customs Duty Exemptions

• Exemption on Tools and Tool Kits: Customs Duty on tools and tool kits used in MRO services has been exempted.

Simplified Clearance Processing

• Simplified Procedures: Clearance processing of parts has been simplified to streamline operations.

100% Foreign Direct Investment (FDI)

• Automatic Route for FDI: 100% Foreign Direct Investment is permitted via the automatic route for MRO services.

 Importance of the MRO Sector

• The Maintenance, Repair, and Overhaul (MRO) sector is essential for ensuring the availability and airworthiness of aircraft. It plays a critical role in the global aerospace and defense

India's Growing Civil Aviation Market

• India is currently the seventh-largest civil aviation market worldwide and is projected to become the third largest by 2026. This growth presents significant expansion opportunities for MRO facilities in the country.

 Current Dependence on Imports

• Approximately 90 percent of MRO requirements in India are met through imports. The domestic MRO sector is still developing but holds considerable growth potential.

 Sector Growth and Employment

• The growth of the Indian MRO sector is driven by the expanding aviation industry, which is expected to generate nearly 90,000 jobs and save about US$ 2 billion in foreign exchange. However, dependence on foreign MROs is likely to persist until the domestic industry matches international standards.

 Market Projections

• The Indian MRO industry is anticipated to grow from US$ 1.7 billion in 2021 to US$ 4.0 billion by 2031, with a compound annual growth rate (CAGR) of 9 percent, surpassing the global CAGR of 5.6 percent.

 Demand for Aircraft Maintenance

• With over 1,000 aircraft on order, India is set to become the third-largest buyer of commercial passenger planes globally, generating a need for 200–300 major maintenance checks The replacement of aging aircraft further contributes to the demand for MRO services.

Expansion into Defence MRO

• India is also expected to become a major defense aircraft market, increasing the demand for military MRO capabilities.

 Significance of the recent steps taken

• The Indian MRO industry is projected to become a $4 billion industry by 2030.
• This policy change is a crucial step towards building a strong ecosystem for MRO services, driving innovation, and ensuring sustainable growth.
• These measures collectively aim to bolster the Indian MRO industry, making it more competitive and efficient while attracting international investment and fostering growth in the aviation sector.

 Looking Forward

• From the lens of the aviation industry, three main initiatives would contribute immensely to drive sustainable growth of the MRO sector:

MUST READ ARTICLE ON INDIA’S AVIATION SECTOR: https://www.iasgyan.in/daily-current-affairs/indias-aviation-industry#:~:text=India%20is%20the%20sixth%2Dlargest,per%20annum%20during%20recent%20years.

MUST READ ARTICLE ON INDIA’S AVIATION INDUSTRY: https://www.iasgyan.in/daily-current-affairs/indias-aviation-industry

 What is HSN Code?

Definition and Purpose

• HSN code stands for “Harmonized System of Nomenclature”.
• This system is used for the systematic classification of goods worldwide.

 Structure and Scope

• HSN code is a 6-digit uniform code.
• It classifies 5000+ products.
• The code is accepted worldwide.

Development and Implementation

• Developed by the World Customs Organization (WCO).
• The system came into effect in 1988.

 How does HSN Code Work?

Structure and Organization

• The HSN code encompasses about 5,000 commodity groups.
• Each group is identified by a six-digit code, arranged in a legal and logical structure.
• It is supported by well-defined rules to ensure uniform classification.

 Why is HSN Important?

Purpose and Benefits

• The primary purpose of HSN is to classify goods from around the world systematically and logically.
• It ensures uniform classification of goods.
• Facilitates international trade by providing a consistent coding system.

 HSN Worldwide

Global Usage

• The HSN system is utilized by more than 200 countries and economies.
• It serves several functions:
  • • Uniform classification of goods.
    • Base for customs tariffs.
    • Collection of international trade statistics.
• Over 98% of merchandise in international trade is classified using HSN.

 Consistency and Variability

• The Harmonized System of Nomenclature number for each commodity is generally accepted by most countries.
• While the HSN number remains the same for almost all goods, some countries may have slight variations based on the nature of the goods classified.

 HSN in India

Membership and Code Evolution

• India has been a member of the World Customs Organization (WCO) since 1971.
• Initially, India used 6-digit HSN codes for classifying commodities for Customs and Central Excise.
• To enhance precision, two more digits were added, resulting in an 8-digit classification.

Understanding the HSN Code

Structure and Classification

• The HSN structure includes:
  • • 21 Sections
    • 99 Chapters
    • About 1,244 Headings
    • 5,224 Subheadings

 Hierarchy and Detail

• Sections are divided into Chapters.
• Chapters are further divided into Headings.
• Headings are split into Subheadings.
• Section and Chapter titles describe broad categories of goods.
• Headings and Subheadings provide detailed descriptions of products.

Example of HSN Code

• Handkerchiefs made of Textile: 62.13.90
  • • First two digits (62): Represent the Chapter number for Articles of apparel and clothing accessories, not knitted or crocheted.
    • Next two digits (13): Indicate the Heading number for handkerchiefs.
    • Last two digits (90): Specify the Product code for handkerchiefs made of other textile materials.

Extended Classification in India

• India uses 2 additional digits for a more detailed classification.
• For example, handkerchiefs made from man-made fiber would have the HSN code 62.13.90.10.

World Customs Organization (WCO) The World Customs Organization (WCO) is an intergovernmental organization based in Brussels, Belgium. It addresses customs-related matters such as the development of international conventions, including commodity classification, valuation, rules of origin, customs revenue collection, supply chain security, and international trade facilitation. The WCO also focuses on customs enforcement, combating counterfeiting and illegal drug trafficking, and promoting integrity. It administers the Harmonized System (HS) and oversees the technical aspects of WTO Agreements on Customs Valuation and Rules of Origin. Established in 1950 as the Customs Co-operation Council (CCC) and renamed the WCO in 1994, the organization now includes 186 countries. Its vision is to enhance customs administration efficiency globally through various customs instruments, including the HS Convention, revised Kyoto Convention (RKC), ATA Convention, Arusha Declaration, SAFE Framework, and the Columbus Program. The WCO also offers online tools like WCO Trade Tools and is led by a Secretary General elected for a five-year term, currently Ian Saunders. The WCO's governance includes a council, Policy and Finance committees, and various specialized committees.

 MUST READ ARTICLE ON INDIA’S AVIATION SECTOR:https://shorturl.at/FcslJ

INDIA’S AVIATION INDUSTRY: https://www.iasgyan.in/daily-current-affairs/indias-aviation-industry 

PRACTICE QUESTION Q. Discuss the current state and future prospects of India's domestic Maintenance, Repair, and Overhaul (MRO) industry. How can policy measures enhance its growth and reduce dependence on foreign MRO services?

 SOURCE: PIB