In this excerpt from MAIT’s recently concluded study on the handicaps faced by Indian manufacturers, the topline findings are a wake-up call. India’s IT hardware manufacturers suffer fiscal disabilities estimated at 6.47 per cent, apart from physical infrastructure and business environment related handicaps that are estimated to cost them 9.40 per cent of their production costs, adding up to a crippling 15.87 per cent
By Sudeshna Das
The government of India recognises the significant role that the manufacturing sector, including the IT electronics sector, can play to achieve India’s potential of economic development. The ‘Make in India’ initiative launched by the prime minister envisions the manufacturing sector growing by 12-14 per cent per annum over the medium term. This accelerated growth rate, in turn, is expected to increase the share of manufacturing in the country’s gross domestic product from 16 per cent to 25 per cent by 2022. Within the manufacturing sector, the growth of the IT electronics sector is critical in making the visionary initiatives of ‘Make in India’ and ‘Digital India’ a reality.
According to an IBEF (India Brand Equity Foundation) study, the Indian electronics market is expected to grow at a compounded annual growth rate (CAGR) of 66.1 per cent to US$ 400 billion by the year 2020 from US$ 31.6 billion in 2015. However, current domestic electronics production accounts for only around 45 per cent of the total market demand, which leaves a wide demand-supply gap to be filled and provides a significant opportunity to improve domestic manufacturing capabilities.
It has been estimated that domestic production will reach US$ 104 billion by the year 2020, still leaving a gap of US$ 296 billion between demand and local production. This is a serious cause for concern because, at this rate, the electronics import bill is expected to far exceed India’s oil import costs by 2020 and could result in a balance of payments crisis.
The government recognises the gravity of the growing import bill and is keen to promote domestic manufacturing in this sector. However, despite the large local market, there have been limited new investments in this area. Even the current capacity utilisation of the industry is low. A number of manufacturers in this industry are global corporations that undertake production in select locations around the globe, and serve the global markets from a few manufacturing plants. Therefore, the industry evaluates a number of countries where manufacturing can be undertaken at a low cost and with limited risks.
Disability burden
A study conducted by the Manufacturers’ Association for Information Technology (MAIT) on ‘Policy Interventions for Net Zero Imports: IT Electronics Sector’ highlights the fact that the IT electronics sector suffers serious economic and fiscal disabilities. It does not have as enabling an ecosystem as that in the competing countries such as China. The cost of manufacturing in India is estimated to be higher when compared to other global options. According to MAIT’s study, the total disability burden that the Indian IT electronics sector has to bear is 15.87 per cent.
India’s higher manufacturing costs are on account of the following reasons:
1. Physical factors such as the higher cost of power, real estate, logistics, additional expenses on account of freight, etc
2. Fiscal factors such as India’s multitude of taxes and duties, which are imposed by both the Central and state governments. Because of their flawed structure, these taxes often discriminate against domestically manufactured products.
This study aims to analyse the state of the IT hardware manufacturing sector in India (with special emphasis on desktops, laptops and servers) identifying its inherent disabilities when compared with China. The study goes a step further and proposes tax policy interventions in the immediate and short term that can lower the disabilities, reignite growth in this sector and help it to contribute to India’s vision of ‘Make in India’ and ‘Net Zero Imports’.
For the purpose of this study, the overall disability has been considered to be the difference in the selling price of a product manufactured in India and the price of the same/similar product when imported, including all import taxes, as a percentage of the selling price of the product manufactured in the country. The disability on account of fiscal/tax factors for the IT hardware segment (notebooks, desktops, servers, etc) is estimated to be 6.47 per cent while the disability on account of physical/business environment factors is estimated at 9.40 per cent. Thus, the total disability that the Indian IT and electronics sector has to suffer is 15.87 per cent.
Controllable factors
The ability of the government of India to address some of the controllable factors such as tax rates will make manufacturing in India more competitive. This will not only increase the capacity utilisation of existing players but also attract investments from other players, who are currently exporting their products into India but not manufacturing here.
The following tax issues need to be urgently considered to provide relief to the industry.
1. Extend the following duty structure currently available to only computer tablets and mobile phones, to desktops, laptops and servers also:
- Provide the option of a concessional rate of excise duty of 2 per cent (without availing CENVAT credit on inputs and capital goods) on the finished goods (desktops, laptops and servers) or alternatively, the option of a standard excise duty rate of 12.5 per cent with full CENVAT credit. In due course of time, as the component manufacturing capabilities mature in India, a similar differential duty regime may be considered for critical components such as motherboards, populated PCBs and SMPSs in order to promote manufacturing of these components and create additional employment opportunities.
- Exemption from payment of customs duty and excise duty on procurement of all goods (parts, components, accessories including sub-parts for the manufacture of parts, components and accessories) required for use in the manufacture of goods eligible for the differential duty regime.
The above duty structure has led to harmonisation of duties applicable on tablet computers and mobile phones. Also, the attractive duty scheme coupled with a significantly higher levy on imports has clearly incentivised the manufacture of these products in India.
2. CST exemption for any inter-state purchase of components or raw materials: As per the current Central Sales Tax (CST) Act, any inter-state sale of components and raw materials for subsequent manufacture and sale is taxed at 2 per cent. This adds to the disability of domestic manufacturers.
3. The 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.
Impact of policy interventions
The study provides estimates of the revenue impact of the proposal for differential excise duty for finished goods without CENVAT credit, with exemption for components, parts, accessories and sub-assemblies of such products, under the following scenarios.
Scenario 1: Excise duty of 2 per cent on domestically manufactured finished goods with CENVAT credit of the 2 per cent tax to eligible B2B buyers: Revenue cost of ₹ 1.03 billion, assuming no incremental substitution of imports by domestic production.
Scenario 2: Excise duty of 2 per cent on domestically manufactured finished goods with CENVAT credit of the 2 per cent tax to eligible B2B buyers: Revenue impact of ₹ 3.23 billion, assuming 100 per cent substitution of imports by domestic production.
These policy interventions by the government for the IT sector would also have the following positive impact:
- Will help in immediate import substitution
- The increased scale of domestic manufacture of finished products will attract component manufacturers to invest and establish their presence in India to meet the local demand
- Increased employment opportunities resulting from increase in production
- Increase in content generation and innovation: Notebooks (NBs) and PCs are expected to continue to be the primary mode of content generation, and India is expected to see a sustained demand in this segment, driven by the IT industry
- Enhanced competitiveness of India’s IT product exports
While the revenue impact is modest, the policy interventions, particularly the fiscal benefits, will go a long way in encouraging the domestic manufacture of these products in India, in line with the ‘Make in India’ and ‘Digital India’ initiatives of the government.
Why policy intervention is required
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“With the right measures, there is potential to ramp up IT hardware production to US$ 2.6 billion within a year and put India firmly on the path to becoming a global ESDM supply chain hub. We hope the government will give due consideration to our proposals on a priority basis, keeping in view that the benefits that would accrue out of this proposal will far outweigh the perceived revenue losses.”
Nitin Kunkolienker, vice president, MAIT and director-CA, Smartlink Network Systems Ltd.
“The ability of the government of India to address some of the controllable factors such as tax rates will make manufacturing in India more competitive. This will increase the capacity utilisation of existing players and also attract investments from other players, who are currently importing their products into India and not manufacturing locally.”
Krishnakumar P., vice president, MAIT and VP – consumer and SMB, Dell International Services.
“Policies aimed at neutralising the manufacturing disadvantages are the need of the hour to meet the goals of ‘Make in India’ and ‘Digital India’ .”
Rahul Agarwal, managing director, Lenovo India.
An excerpt of a report on ‘Policy Interventions for Achieving ‘Net Zero’ Imports – IT and Electronics Sector’ published by the Manufacturers’ Association for Information Technology (MAIT)
