Increase in FDI limit in defence sector, suggests an industry report

The government should allow a minimum of 51 per cent FDI in defence sector without any riders to linkages with ‘modern technology,’ so as to enable international defence companies to exercise adequate control over joint venture companies, intellectual property rights (IPR) and product quality, suggested an ASSOCHAM-BDO joint study.

“The increase in FDI limit will bring in the capital for establishing new facilities and scaling up current facilities while benefitting India through large scale job creation,” noted the study titled, ‘Indian aerospace manufacturing ecosystem,’ conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) jointly with global advisory services firm BDO.

It also said that government must restore and strengthen tax incentives for R&D activities to encourage investments in technological innovations by MSMEs. “This will encourage foreign defence companies to bring best practices and technology to create domestic R&D partners and contribute towards a robust aerospace ecosystem.”

In addition, to boost foreign investments in aerospace R&D, it should be made as an eligible activity for discharging offset obligations.

Noting that MRO industry, which plays significant role in supporting aerospace domain, has been marred with high tax rates in India and thus has been losing business to facilities abroad, the ASSOCHAM-BDO study recommended rationalising taxation for MRO segment and granting it infrastructure status to attract investments in this space, which would in turn strengthen overall aerospace ecosystem in India.

The study also said that development and transfer of high-end technology is crucial to boost aerospace manufacturing ecosystem. “Government must enable ease of ToT and ensure EoDB for emerging MSMEs so as to enable them to develop capabilities to be part of global supply chain.”

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