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The Union Budget 2026 marks a decisive policy shift for the aviation and aerospace sector by placing manufacturing, MRO (maintenance, repair and overhaul), and supply-chain localization at the centre of growth strategy. The most impactful element of this shift is the extension of the customs duty exemptions on aircraft parts, components, and raw materials – aimed at strengthening India's position as a global aviation manufacturing hub.
For an industry that depends heavily on precision components, specialized inputs, and global sourcing, the exemption from customs duty on key imports can significantly alter cost structures. As India prepares for a projected tripling of its commercial fleet to 2,250 aircraft by 20351, the Budget 2026 signals that India is no longer focusing only on airline expansion and connectivity but is now equally committed to strengthening domestic aerospace production ecosystem.
Customs duty exemptions: A thrust for local manufacturing
One of the most consequential proposals in Budget 2026 is the exemption of Basic Customs Duty ('BCD') on aircraft components and parts, used in the manufacture of all kinds of aircrafts (civilian, training or others). This exemption has been introduced by insertion of a new Sl. No. 335A in 45/2025-Cus. dated 24.10.2025 ('Notification 45/2025')2. Earlier, such exemption was available only to the Public Sector Units under the Ministry of Defence ('MOD') under Sl. No. 335. By extending the BCD exemption on aircraft components and parts to all manufacturers of aircrafts, the government aims to promote local assembly and full-scale manufacturing in India and to support upcoming investments by global OEMs in building assembly lines in India.
Notably, the newly inserted Sl. No. 335A contains a proviso- which states that parts and components imported by Public Sector Units for defence sector will continue being eligible for exemption under extant Sl. No. 335, which requires necessary approvals from MOD.
Additionally, as part of Budget changes- a specific defence related BCD exemption has been introduced by insertion of Sl. No. 334A to Notification 45/2025. This exemption is available to Public Sector Undertakings under MOD on raw materials imported for manufacture of such aircraft parts which will be used for maintenance/repair/ overhaul of aircraft or aircraft parts (such as engines etc.). For claiming this exemption, the importers need to obtain certification from the MOD regarding the end-use and the quantity, description & technical specifications of the goods being imported.
Until now, BCD exemption under Sl. No. 334 was available for import of raw materials for manufacture of aircraft and aircraft parts. This exemption was available to all manufacturers, without any strings attached to end-use3. The introduction of Sl. 334A, brings in a specific BCD exemption for the defence sector for import of raw materials used in the manufacture of those aircraft parts which may be required for defence-related MRO services. This newly introduced exemption is more rigorous in terms of compliance and has perhaps been inserted to regulate the MRO-related inputs imported specifically for defence purposes.
Thus, the question which invites consideration is- despite insertion of Sl. No. 334A, can a Public Sector Unit under MOD avail exemption under existing Sl. No. 334 which provides essentially the very same exemption without the extra compliance. In the past, the Tax Research Unit ('TRU') of the Government of India (Ministry of Finance) has clarified that due to revision or amendments in the exemption rates introduced by the Government, it may be possible that the same product/ item is covered by more than one notification / exemption4. In such a situation, the rate beneficial to the assessee will have to be extended if he fulfils the attendant conditions of such exemption(s). It is also otherwise a trite judicial principle that an assessee can choose to avail the more beneficial exemption available to it.
New Partnerships, New Altitudes
India has already been witnessing steady momentum in aerospace manufacturing through joint ventures and supplier partnerships with global OEMs. Budget's customs exemptions reinforce and accelerate this trend.
In a recent move, the global aircraft manufacturer - Airbus has partnered with Tata Advanced Systems for pioneering 'Make in India' project to deliver 56 'Airbus C295' aircrafts to the Indian Air Force. A Final Assembly Line (FAL) has been set up in Vadodara, Gujarat for the same.5 Similarly, Boeing has entered into a joint venture with Tata Group for production of AH-64 Apache helicopter fuselages in Hyderabad, and has also set up the Boeing India Engineering and Technology Centre (BIETC) in Bangalore & Chennai to undertake complex advanced aerospace work.6
Budget 2026, therefore, arrives at a strategically critical moment. By eliminating customs duties on key inputs and encouraging domestic manufacturing and MRO, it creates the right incentives for global players like Airbus and Boeing to deepen their long-term presence in India. Aviation sector, more especially airlines- while being famously subjected to rigorous compliances, are critically dependent on faster turnarounds. Presently, delays in clearances from customs and uncertainty regarding which goods may qualify as 'parts' of aircraft are some of the issues which need addressal.
Conclusion
The Budget 2026 marks a turning point for India's aviation sector from a customs law and industrial policy perspective. By exempting customs duty on aircraft parts, components and defence-related raw materials, the government is not merely offering a temporary relief – it is architecting a long-term incentive platform to build domestic aerospace capability, attract global OEM investments, and catalyse a broader manufacturing transformation. For HAL, Airbus, Boeing and other industry players – these changes promise reduced costs, stronger competitiveness and clearer pathways for capital deployment.
Footnotes
2 The exemption is available subject to the condition that the importer follows the procedure set out in Customs (Import of Goods at Concessional Rate of Duty or for Specified End Use) Rules, 2022 ('IGCR Rules').
3 Subject to fulfilment of IGCR Rules.
4 Tax Research Unit D.O.F. No. 334/1/2008-TRU dated 29.02.2008
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