Union Budget 2022-23: What It Means For India’s Tech And Electronics Industry

By Rahul Chopra and Siddha Dhar

Many dream projects of Prof. (Dr) Ashok Jhunjhunwala, IIT Madras, like battery swapping and rural ATMs, seem to be coming true, albeit a bit late. Guess he will be happy to see them coming better late than never

The first thought that went through my mind while trying to compile this list of key Budget announcements was that Prof. (Dr) Ashok Jhunjhunwala at IIT Madras would at last be happy and satisfied. We are working on a story on Prof. Jhunjhunwala, inspired by his vision and grit. Throughout his 30-plus-year career, he has made bold attempts to bridge the gap between Bharat and India. It’s frustrating to see how bureaucrats can kill dream projects of technocrats. But that’s a different story to be told, and we will be sharing it with you soon.

On the morning of February 1, 2022, the Finance Minister Nirmala Sitharaman jolted the nation through her Union Budget 2022-23 speech. While the speech in itself was not alarming, what made this Budget different from those of the past years were the surprising and exceptional elements added in it, making it one whose purported impact would be remembered for a long time.

While the implementation and impact of these decisions can only be seen by those who choose to wait patiently, here are some ways in which the Union Budget 2022-23 could prove to be a game-changer for the electronics industry of India.

The fundamentals

Let us first look at the broader initiatives announced by the government of India and how they are liable to impact the tech and electronics demand in the country:

1. Capex up by 35.4%. Capex target has been increased from ₹5,540 billion to ₹ 7,500 billion with FY23’s effective capex seen to be at ₹1,070 billion. With increasing share of tech in any capex investment, can this translate into a good increase in demand for tech solutions?
2. 150,000 new banks. All the 150,000 post offices will come on the core banking system, enabling financial inclusion and access to accounts through net banking, mobile banking, ATMs, etc. Can this result in greater demand for ATMs, computers, networking, security, and related electronics?
3. 400 new trains. 400 new-generation Vande Bharat trains will be developed and manufactured in the next three years. Again, can this result in increased demand for display screens, cameras, and other tech solutions involved in trains?
4. Digital currency! Digital Rupee, using blockchain, to be launched by RBI in 2023. Now this could be a game changer—it could end or reduce demand for many products like currency counting machines and ATMs, and increase demand for mobile devices to enable transactions—if we need anything other than our mobile phones.
5. 5G in 2022. 5G spectrum auctions to be conducted this year, which may result in greater demand for 5G related electronics, both at the back end and front end.
6. Rating for MSMEs. Rs 60 billion programme to rate MSMEs to be rolled out over five years. This may make it easier and safer for us to select the right firms to do business with or extend credit to.
7. E-procurement system. A completely paperless, e-bill system will be launched by ministries for procurement. Will this increase demand for paperless tech, including scanners, computers, and networks? Plus, will this enable faster and more transparent (and less corrupt) procurement?
8. Indigenous rail network. 2,000km rail network to be brought under indigenous technology (KAWACH) for safety and capacity augmentation. Will this result in demand for various tech solutions related to safety, security, and signaling?
9. Domestic defence. 68% of capital procurement budget in defence will be earmarked for domestic industry in 2022-23 (up from the 58% last fiscal). Hopefully, this too should result in increased demand for indigenous electronics and tech solutions.

Change in tariff and notifications

There have been numerous changes in customs tariffs, especially keeping in mind the goal of the government to provide a boost to the electronics manufacturing sector and make the country a manufacturing hub. More than 350 obsolete exemption notifications have been deleted. However, various rate changes and structural changes have made it difficult to gauge how it would affect importers who are looking to claim an exemption that has been revised.

There has also been a change in customs notifications and customs tariffs, wherein many exemptions have been moved from notification to the tariff. Such movement, in certain cases, has resulted in change in effective rate of duty. But in some cases, there are no changes in the effective rate of duty. A lot of new tariffs have also been introduced. New entries with respect to wireless products have also been introduced.

The industry, in general, has been glad that the government has taken in consideration their several recommendations and introduced changes in duties on inputs through customs duty in several products, such as chargers, transformers, solar cell inputs and reviewing Customs Notification 25/1999 and 50/2017, thereby rationalising the duty considerations for various electronic components and subassemblies.

While there have been many changes made to customs tariffs, some of the significant ones are included in Table 1.

There have been ongoing disputes at various ports with regards to classification of wireless headphones and earphones as to whether they would be classified under Chapter 8518 or they can be classified under 8517 62 90 as wireless communication devices. There is an old WCO ruling also being followed as a 2000 circular by the board, which deals with single-piece wireless earphones, wherein the board classified that those products would be classified under 8517. Following the same logic, a lot of importers have been adopting the same classification for their wireless earphones and headphones because the rate of duty by virtue of exemption became nil or 10%.

Now, however, these entries for wireless earphones and headphones have been brought out specifically in 8518. It helps importers to the extent that at least now these entries have been particularly put under this particular heading.

Photovoltaic cells have had an increase in rate of duty. This is an interesting move since these parts are also part of India’s commitment to WTO with regards to exempting these parts as part of ITA commitment. Whether it will be a violation of India’s commitment will be a matter to be seen.

Various entries have been amended and substituted. It becomes important to look into these exemptions carefully and specifically. Further, vide Customs Notif 02/2022 (NT), major changes have been made in ICGR items (Customs 25/1999), thereby easing the procedure for availing end-use based duty exemption on capital goods.

In terms of the concessional rate on basic customs duty on capital goods that are used for manufacturing electronic items, a sunset date has been introduced for these since capital goods manufacturing and capacity building has been a big goal of the government. Considering that, there is a phase-wise reduction in tariff now and by 31.03.2024 all these would be liable to tariff rate and duties and exemptions would be withdrawn. Businesses importing such goods need to be wary of this and make sure that all imports are made before this date.

Similarly, in notifications on the import of raw materials for electronics manufacturing, multiple entries have been deleted, the objective being to take care of overlap and duplication of notifications. It is not that by deletion of these entries the exemption is completely lost, because there are alternative exemptions which are also available. This is more of a rationalisation or fine tuning of notifications.

Phased manufacturing programme (PMP)

Phased manufacturing schemes for wearable and hearable devices—a growing market segment in electronics—as well as smart meters, has also been a welcome move of the government, which is expected to put these high-growth sectors on track for domestic value added manufacturing. It provides the opportunity for the industry to have access to raw materials in India. As expected, there have been tweaks made in the exemptions, with rates being increased in a phased manner.

PMP for wrist-wearable devices. Regarding PMP for wrist-wearable devices (smart watches), parts (1 to 7) in Table 3 for manufacture of wearable devices fall under Tariff item 8517 62 90 of the Customs Tariff.

For smartwatches, the tariff rate had been 20% under Chapter 8917 and there was no exemption. Chapter 8517, however, specifically excludes smartwatches from exemption. As far as other items included in the exemption Notification 11/22, they have been given exemption as of now, but the rates are going to increase over a period of time.

PMP for hearable devices. Parts (1 to 7) in Table 4 for manufacture of hearable devices fall under Tariff item 8518 21, 8518 22, 8518 29 or 8518 30 of the Customs Tariff.

For hearable devices, the notification provides a clear definition as to what would be considered as a hearable device. Similarly, items for these have also been given exemption in a phased manner.

PMP for smart meters. The parts in Table 5 for manufacture of hearable devices fall under Tariff item 9028 30 10 of the Customs Tariff.

The Lackeys

While the exemptions are much appreciated, they still have plenty of gray areas. There are items which have been listed under multiple chapters that have different exemption rates. For instance, a communication module is an item listed under smart meters’ exemption under 8517 69 60, but there are some communication modules which will also go under 8517 62 90 because they have the ability to communicate on their own on a standalone basis. In that case, under which chapter should these be classified by the importer to be able to get the exemption?

“It is important that before any change has been effected in terms of imports, there must be a clarity as regards the availability of exemption notification and the chances of litigation once the exemption is claimed by the importers. This is just one example to show how changes have been made to the tariffs but there are some things lacking which should be addressed or they may bite us later,” says Jain.

To dos promised

Here’s a list of initiatives promised by the FM, which relate directly to tech.

1. Optical fibre solutions. Contracts for laying optical fibre in villages to be awarded under BharatNet project under PPP in 2022-23. When executed, this should result in good demand for fibre-optics and related electronics.
2. 5G equipment and devices. Scheme for design led manufacturing to be launched for 5G ecosystem as part of PLI scheme to enable affordable broadband and mobile communication in rural and remote areas. This will provide and promote R&D and commercialisation of tech and solutions.
3. E-passports with chips. The issuance of E-passports using embedded chips and futuristic technology will be rolled out in 2022-23 to enhance the convenience for the citizens in their overseas travel. The back cover is expected to have a small silicon chip!
4. Tax benefits for startups extended. Existing tax benefits for startups, which were offered redemption of taxes for three consecutive years, to be extended by one more year. That’s good news for electronics startups!
5. Duty concessions for electronics. Duty concessions being given to promote electronics manufacturing of mobiles, wearable and hearable devices.
6. Increased PLI for solar modules. ₹195 billion additional allocation for PLI for manufacturing high-efficiency solar modules has been made. This should result in further boost to ‘Made in India’ solar modules.

The promising statements

Here are promising statements that the FM made, which, if executed, could affect the electronics industry.

1. Opening of defence R&D. Defense R&D will be opened up for industry, startups, and academia with 25% of defense R&D budget. Private industry will be encouraged to take up the design and development of military platforms and equipment in collaboration with DRDO and other organisations through SPV model. Can this be the game-changer for India’s electronics industry?
2. Battery swapping policy. A battery-swapping policy to be brought out with interoperability standards to boost EV ecosystem. While India had an opportunity to lead this space—had the Government executed Prof. Jhunjhunwala’s plans in 2019—one hopes that this policy (whenever announced) will ensure we are not left behind, and EVs will become as budget-friendly as their ICE counterparts, and thereby provide tremendous demand for electronics.
3. Private sector in EV. Private sector will be encouraged to create sustainable and innovative business models for battery and energy as a service, improving the efficiency in the EV ecosystem. Great thought. Look forward to greater execution.
4. Digital health. An open platform for the National Digital Health Ecosystem will be rolled out. It will consist of digital registries of health providers and health facilities, unique health identity and universal access to health facilities. Again, can create demand for multiple tech solutions and products to test and measure health parameters and store that data.
5. Drones for agri. Kisan Drones for crop assessment, land records, spraying of insecticides expected to drive a wave of technology in the agri sector. Thankfully, we do see a bit of action already on the ground.
6. Data centres and energy storage to be infra. Data centres and energy storage systems to be given infrastructure status; this would provide easy financing.

In essence, the Union Budget has highlighted an objective that the Centre has been vehemently addressing for the past couple of years—the Atmanirbhar Bharat initiative. With the various electronics-related production linked Incentive (PLI) schemes and policies that the government of India has approved in the past year, it’s eagerness to grow the EDSM sector of the country has only grown with the Union Budget. It is now for us to see how far these benefits take our country in the race to become a global leader in the electronics and tech industry.