Leading Industry Players Hopeful of Positive Policy Action in Budget 2016-17 to Kick-start IT Manufacturing in India

Leading players from the Indian IT sector have expressed hope that the government would respond favorably to industry demands for a level playing field to kick-start IT manufacturing in the country. 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).

Commenting on the important findings of the MAIT report, Mr Sandeep Aurora, Director Marketing and Market Development, Intel South Asia said, “We believe that PCs are an important tool of productivity, learning and development and that it is critical to provide consumers a wider choice of affordable computing devices for their specific needs. In line with this, we hope that this year’s budget will extend duty incentive schemes given to mobile phones and tablets to all the ITA goods including PCs which is critical for empowering every citizen with technology. Several IT hardware players have their manufacturing facilities in India that are currently under-utilized due to weak demand. The suggested duty differential will spur the domestic consumption leading to increased production, thereby boosting manufacturing by these players and creating a winning proposition for the government on ‘Make in India’ especially because this can be done without extending any capital support or incentives, for example, M-SIPs, since the facilities already exist.”

Mr Vinod K. Srivastava, Director, Integrated Operations, India at Lenovo had this to add: “With the Government’s strong focus on the ‘Make in India’ initiative, India is all set to become ‘the next manufacturing hub’ of the world. We are hopeful to get relief on the various regulatory and operational issues affecting the manufacturing sector, which will in turn boost the IT manufacturing ecosystem augmenting IT penetration in the country and attract investments for the industry. At present, one of the biggest hurdles the sector faces is the non-availability of an affordable component ecosystem, and unfavorable tax structure, causing higher costs for local manufacturing of PCs. Following the success of duty differential for smartphones and tablets, there is also a pressing need to introduce the same for PC manufacturing. We are also hopeful that the Government is able to roll out GST next and simplify the tax regime.”

Commenting on the proposed measures suggested by MAIT P. Krishnakumar, VP, Consumer & Small Business, Dell India Private Limited and VP, MAIT said, “As a technology company which has been manufacturing in India since 2007, we applaud the government’s focus on electronic manufacturing and appreciate policy measures taken under ‘Make in India’. To grow electronic manufacturing in India, it is important that a local component manufacturing ecosystem is developed.  To make this happen, a holistic policy approach is required, which takes into account domestic demand and export potential and treats electronic system design and manufacturing as a unified priority sector.”

“As recommended in the MAIT report, we hope that the government rationalizes the tax structure to promote manufacturing of desktops and notebooks, as has already been done for tablets and mobile phones, and also provides necessary export incentives with a vision to make India a global hub for electronic manufacturing. Such measures will help India become a competitive destination for manufacturing and attract local component manufacturing, thereby bringing in more investments, generating employment, rationalizing trade imbalance and increasing revenue for the government,” Mr. Krishna kumar further clarified.

Leading Technology firm Microsoft Corporation supported views of Chipmaker Intel and PC manufacturer Lenovo and Dell expressing that, “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.”

Other MAIT members who are amongst the key PC and Electronic Hardware manufacturer in India also supported the finding of the report saying that, “We hope Government will give consideration to proposals highlighted in MAIT report in Budget 2016-17, keeping in view that the benefits that would accrue out of this proposal will far outweigh the perceived revenue loss.”

According to MAIT, 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.

To address the IT industry’s 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.

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 and Electronics goods. Some key tariff policy related issues and their impact are summarized in Annexure A.

Estimated Impact
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.

Annexure A

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 et al. 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 details.

• 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.

“We believe that PCs are an important tool of productivity, learning and development and that it is critical to provide consumers a wider choice of affordable computing devices for their specific needs. In line with this, we hope that this year’s budget will extend duty incentive schemes given to mobile phones and tablets to all the ITA goods including PCs which is critical for empowering every citizen with technology. Several IT hardware players have their manufacturing facilities in India that are currently under-utilized due to weak demand. The suggested duty differential will spur the domestic consumption leading to increased production, thereby boosting manufacturing by these players and creating a winning proposition for the government on ‘Make in India’ especially because this can be done without extending any capital support or incentives, for example, M-SIPs, since the facilities already exist.”

Sandeep Aurora, Director Marketing and Market Development, Intel South Asia

“With the Government’s strong focus on the ‘Make in India’ initiative, India is all set to become ‘the next manufacturing hub’ of the world. We are hopeful to get relief on the various regulatory and operational issues affecting the manufacturing sector, which will in turn boost the IT manufacturing ecosystem augmenting IT penetration in the country and attract investments for the industry. At present, one of the biggest hurdles the sector faces is the non-availability of an affordable component ecosystem, and unfavorable tax structure, causing higher costs for local manufacturing of PCs. Following the success of duty differential for smartphones and tablets, there is also a pressing need to introduce the same for PC manufacturing. We are also hopeful that the Government is able to roll out GST next and simplify the tax regime.”

Vinod K. Srivastava, Director – Integrated Operations, India, Lenovo

“As a technology company which has been manufacturing in India since 2007, we applaud the government’s focus on electronic manufacturing and appreciate policy measures taken under ‘Make in India’. To grow electronic manufacturing in India, it is important that a local component manufacturing ecosystem is developed.  To make this happen, a holistic policy approach is required, which takes into account domestic demand and export potential and treats electronic system design and manufacturing as a unified priority sector. As recommended in the MAIT report, we hope that the government rationalizes the tax structure to promote manufacturing of desktops and notebooks, as has already been done for tablets and mobile phones, and also provides necessary export incentives with a vision to make India a global hub for electronic manufacturing. Such measures will help India become a competitive destination for manufacturing and attract local component manufacturing, thereby bringing in more investments, generating employment, rationalizing trade imbalance and increasing revenue for the government.”

P. Krishnakumar, VP, Consumer & Small Business, Dell India Private Limited

“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.”

Leading Technology firm Microsoft Corporation, Chipmaker Intel and PC manufacturer, Lenovo and Dell