Manufacturers’ Association for Information Technology (MAIT), India’s apex body representing IT manufacturers, has suggested some key policy and market interventions to achieve the vision of ‘Net Zero Imports’ and ignite a culture of domestic IT and ESDM product manufacturing in the country.
Within the manufacturing sector, the growth of the IT electronics sector is critical for realizing the visionary initiatives of ‘Make in India’ and ‘Digital India’ launched by the Government, and help India garner a 10% share of the worldwide ESDM sector by 2020. What’s more, there is potential to generate 100,000 direct jobs and 300,000 jobs in components manufacturing over the next five years. These and other findings were revealed today in an independent MAIT study titled “Policy Interventions for ‘Net Zero Imports’: India IT-ESDM Sector” (February 2016).
Mr Anwar Shirpurwala, Executive Director, MAIT said, “India has a large and growing market for IT products and ESDM hardware. Due to various disabilities impacting domestic manufacturers, a large part of this market is being served by imported products, mostly from China. In 2015, we believe the share of domestic manufacturers was only 45 per cent of the total ESDM market of USD 31.6 billion. For the IT products market of USD 5.8 billion this proportion was even lower at around 32 per cent.”
Domestic manufacturers are at a competitive disadvantage vis-à-vis imports on account of both tax provisions as well as market factors. For example, even though domestic and imported products are subject to the same statutory rates of excise duty and VAT, the effective burden of indirect taxes on domestic products is estimated to be 7 percentage points higher than on imports. This tax disadvantage is compounded by the lack of economies of scale and an underdeveloped ecosystem of parts manufacturing in India. The cumulative amount of disabilities is estimated to be in excess of 16% of the price of products.
Proposed Policy and Market Interventions
To address this concern and to encourage domestic manufacturing of IT products, the industry is requesting that the differential excise duty regime introduced by the Government in 2015 for mobile phones and tablets be extended to Notebook PCs and Desktop PCs. The differential duty regime requires the excise duty on Notebook PCs and Desktop PCs to be brought down to 2% without any facility for input tax credits, and an exemption from excise duty for parts, components and sub-assemblies, which go into manufacturing of PCs.
This will provide a level playing field for domestic manufacturers of these products and allow them to serve a larger share of the Indian market. The manufacturers of these products are operating well below their capacity and would be able to ramp up their production very quickly without any gestation lag associated with new greenfield investments. The increased scale of domestic production will facilitate development of the ecosystem of production of components and parts.
Based on the legacy scenario of IT-ESDM manufacturing in India, MAIT has highlighted key issues that need to be addressed on priority, to improve the business environment in the country and to attract more investment in manufacturing of IT & Electronics goods. A few key issues and their impact are summarized in Appendix A.
Policy interventions by the government for enabling domestic manufacturing by the IT-ESDM sector would also bring in the following positives:
Help in immediate import substitution, doubling domestic IT production to USD 2.6 billion within one year, thereby saving valuable foreign exchange on imports and contributing towards sustainable reduction of the current account deficit to that extent.
Provide competitive advantages for export of IT products from India.
Attract component manufacturers, thus providing a base for global component manufacturers to establish their presence and invest in India.
Increased employment opportunities resulting from increase in production, potentially translating into creation of 400,000 jobs by import substitution of estimated additional demand of 30 million PCs and components per annum over the next five years.
Increase in local content generation and higher value added innovation: Notebook PCs and Desktop PCs are expected to continue to be the primary mode of content generation and India is expected to see a sustained demand driven by the IT industry.
Commenting on the report findings, Mr Satya Poddar, Senior Advisor, Ernst & Young said, “While the direct revenue impact of a differential duty regime is modest, it will go a long way in providing a level playing field for domestic manufacturers and enable them to serve a larger share of demand for these products in India. It will also help in the development of the ecosystem of parts and components manufacturing in India, consistent with the “Make in India” and “Digital India” programmes of the Government.”
“We hope Government will give consideration to our proposals in Budget 2016-17, keeping in view that the benefits that would accrue out of this proposal will far outweigh the perceived revenue loss,” Mr Shirpurwala of MAIT concluded.
High Cost of Domestic Manufacturing: Need for Fiscal Policy Measures and Market Interventions
High Cost of Domestic Manufacturing: The cost of manufacturing is estimated to be higher in India vis-à-vis other global supply hubs like China, Taiwan, Thailand etc.
The reasons of high cost are constraints in physical infrastructure availability, resulting in higher cost of Power, Real Estate, Logistics/Freight etc. and ‘ease of doing business’ constraints that result in delays in securing statutory/government permissions, tax refunds, rebates etc. The constraints in availability of physical infrastructure and legacy business environment issues are estimated to account for as much as 9.40% of the cost of finished IT-ESDM goods, as per the MAIT-Ernst & Young report.
Fiscal issues: Further, fiscal factors including the multitude of taxes and duties levied by both the States and the Central Government adds up to another 7.05% of the price of finished goods, leading to an overall disadvantage of over 16% in the final end product. Some of the policy measures needed to correct the cost imbalance due to fiscal issues are listed below, in more detail.
Extension of the following duty structure:
Exemption from payment of customs duty and excise duty on procurement of all goods (parts, components, accessories including sub-parts for manufacture of parts, components and accessories) required for use in manufacture; and
Option of concessional rate of excise duty of 2 per cent (without availing CENVAT credit on inputs and capital goods) on the finished goods or alternatively, the option of standard excise duty rate of 12.5 per cent with full CENVAT credit.
Basic Customs Duty (BCD) and Excise Duty reduction on components for high-import products: Extend the BCD and excise duty reduction on components beyond the current set of products. Focus on ITA-1 high and medium value addition products, such as smart cards and PoS printers and high volume non-ITA-1 products.
Extend SAD exemption for all components of ITA-1 products: In the last Budget (2015), SAD exemption was provided for select components of products such as smart card, PC, solar PV, etc. The exemption needs to be extended to all ITA-1 products.
CST exemption for any inter-state purchase of components or raw materials: As per current CST Act, any inter-state purchase of goods for subsequent purchase is taxed at 2%. This adds to the disability of domestic manufacturers.
Under GST regime: The benefits requested above, should be continued under the GST regime also. In case the differential duty regime is discontinued under GST, the incentives could take the form of cash refunds, as is currently done under the VAT system at the state level.