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1. Preamble
From wealth creation to improving the quality of life for all sections of the society, IT has come to be recognized as a key-leveraging factor in National Development. Electronics is the enabling technology of the information economy and accounts for about 4% of the global GDP. Electronics/IT is not only the fastest growing industry worldwide but also has a profound effect on other industries in increasing productivity, changing cost structure and even the way we live and work.

Indian Electronics/IT hardware sector has grown at a CAGR of 11.6% during 1991-2002 reaching a production of Rs. 37,000 crores during the year 2002-03. Growth in production during the VIII Plan (1992-97) and IX Plan (1997-2002) was15`% and 10.3% respectively.
During the VIII plan, investment came mostly in high growth areas like Colour Televisions, picture tubes, and glass shells, audio & video components. However, during the IX plan, domestic electronics hardware companies have started loosing their dominance in market share and have resorted to trading with sliding of duties on end products. Share of imports in the total Electronics/IT hardware consumption is progressively increasing. This trend indicates that overall manufacturing in the country is declining despite the growth in production. India, presently accounts for about 0.6% of the global Electronics/IT hardware production of US $ 1200 billion (2001). As per the Tenth Plan projection (realistic scenario), Electronics/IT hardware production in terminal year (2006-07) is targeted at Rs. 69,000 crores (CAGR 15%).

The removal of duty protection coupled with the relatively small domestic market and the domestic market orientation of Indian manufacturers has resulted in the closure of many of the domestic manufacturing units. This trend needs to be reversed. India has the potential to develop and manufacture Electronics/IT hardware for the global market and gain higher global share besides meeting the country’s future requirement in the converging areas of information, communication and entertainment.

Countries like Taiwan, Korea, Malaysia and of late China have recorded much higher growth in Electronic/IT hardware and are exporting worldwide. Presently, these 4 countries together account for 20% of the global Electronics/IT hardware production. China has already emerged as the 3rd largest manufacturer after USA and Japan. The electronics hardware manufacturing in the above countries is significantly contributing to their country’s GDP and also helping them in creating wealth for their people, improving the efficiency of doing business, generating employment and moreover providing them better information infrastructure.

A comparative statement on penetration levels of various Electronics/IT products in India and China reflects the level of their achievement in a short span:

The Information Technology Agreement (ITA-I) of the WTO (World Trade Organisation) to which India is a signatory, makes it mandatory to make the customs duty zero on select imported electronics components and products. Accordingly, the Government of India has been reducing customs duties on these items gradually over the last five years and the customs duty applicable on 217 tariff lines will be eliminated from the year 2005.
Recognizing the potential of Electronics/IT industry, the Prime Minister’s Office set up a National Task Force on Information Technology and Software Development in May, 1998 under the Chairmanship of Shri Jaswant Singh, then External Affairs Minister.
The first report of the Task Force on Software sector contained 108 recommendations and the same was accepted by the Government. Today Software sector is on a high growth path (26% during 2002-03) and is contributing significantly to the National GDP, earning substantial foreign exchange (US $10 billion) and generating employment.
The National Task Force set up a Hardware Panel for "Development, Manufacture and Export of IT Hardware". The Task Force was of the view that Hardware industry and the software industry are two sides of the same coin, the success of one, whether it is export of software of $50 billion by 2008 or IT penetration drive for realizing "IT for all" by 2008, depends on the concomitant success of the other.
The second report (Part II) of the Task Force set exports target for IT Hardware of US $ 10 billion by the year 2008. In view of the problems faced by the industry relating to inverted tariff structure, inability to attract FDI, procedural bottlenecks, high incidence of duties on capital goods and Government’s commitment to implement ITA-1 of WTO by 2005, the growth of Electronics/IT hardware industry was impeded. The Task Force in its Part-II report basically suggested measures to make the IT hardware industry competitive and achieve high growth by encouraging FDI, bringing tariffs on inputs and capital goods to zero % and simplification in EXIM Policy and Customs procedures. It recommended an integrated policy package in the form of 84 policy bullets, which focussed on the following major issues:
- Fiscal Policies (15 points)
- Soft Bonded IT Unit (S-BIT) Scheme (31 points)
- Procedural Simplification (9 points)
- Labour Laws (1 point)
- Export, investment and RBI related issues. (10 points)
- Misc.(18 points)
While, the recommendation of the Report could not be implemented but the general approach of the Report is being pursued in phases. Over the last 4 years, EXIM Policy for Electronics & IT products has been liberalized, Customs & Excise procedures simplified, EDI implemented, tariff on specified capital goods have been brought down to 10% and a number of raw materials to 5%. These initiatives to some extent have addressed the problem related to inverted tariff structure. In line with suggestions on the S-BIT scheme, the EHTP scheme has been tailored by incorporating certain modifications therein.
In spite of the above efforts to provide the conducive environment, the Electronics/IT hardware manufacturing/industry continues to languish and suffers from several disability factors making it uncompetitive with international counterparts, under developed domestic demand, lack of export orientation, poor response of FDI and lower technology levels.
Increasing dependence of economic activity on information, coupled with globalization of capital flows, trade, manufacturing etc. have lead Government all over the world to play an proactive role in setting up and nurturing the development of competitive Electronics/IT industry in their respective countries.
In the overall framework of meeting the challenge of 2005, development of domestic market, integrating the Electronics/IT hardware sector with global stream, become internationally competitive and putting the Electronics/IT hardware industry on a high growth path, implementation of the policy package as outlined in the following would be important and timely.
2. Vision, Objectives & Strategy For Supporting Electronics/It Hardware Manufacturing
Government has a role in setting favorable macro-policies, and support strategies suiting specific sectors that help business realize full potential in creating wealth. In view of the special characteristics of Electronics/IT Hardware and the WTO stipulation for elimination of duties on this segment (rather than their reduction to international levels in other segments of manufacturing), this sector needs a special sectoral treatment rather than being governed by general policy framework.
The vision, objectives and strategy for supporting Electronics/IT hardware manufacturing are outlined in the following:
Vision
To make India one of the key players in the global electronics/IT hardware- manufacturing sector and integrate with the global value-added-chain.
Objectives
Growth of Electronics/IT Hardware industry in India has not been consistent with her market potential. The objectives of the strategy in supporting/encouraging hardware manufacturing would thus be as follows:
a) Spurring the Domestic demand
b) Making Indian Electronics/IT Hardware Sector globally competitive
c) Facilitating the industry for addressing global markets
d) Facilitate formation of catalysts for growth of the industry
e) Positioning India in the global value-added-chain
f) Focus on value-added products
g) Reducing dependence on imports
h) Help businesses realise full potential in creating wealth.
Strategy For Supporting Electronics/It Hardware Manufacturing
The strategy for supporting/encouraging manufacture of hardware in India is aimed at providing a fertile business ambience in which the investments would flourish and making the industry globally competitive.

3. Tariff Policy
(i) Reduction of customs duty to zero% on all the raw materials and inputs required in the manufacture of electronic components.
(ii) (Reduction of customs duty to zero% on all capital goods for IT and Electronics sectors.
(iii) The key reason for the small market size in India, are the high prices in India compared to international counterparts. The single largest factor is the higher indirect taxation level ( and its cascading effect) which in certain cases goes up to 40% of the consumer price compared to 5-17% in other countries. Presently the CENVAT (excise) on most of the Electronics/IT products is 16%. In addition, Sales Tax ranging between 4-15% is levied in various States. CST, Octroi, entry tax, etc. are additional. While a single (composite) VAT levy at 17% or lower is desirable, in the short term, excise duty be levied on domestically manufactured products (in DTA, EHTP and Hardware Manufacturing Cluster Parks) at 50% of the specified excise duty rates. The full/specific excise duty rates be used for levy of CVD on imported products to compensate for disability factors inherent to Indian operations. Combined with reduction in CST to 2% in the Union Budget 2003-04, this initiative alone would result in a demand increase by 40%.
(iv) Rationalization of Sales Tax/proposed VAT on all Electronic and IT products (including components) to 4%.
(v) Customs duty on finished equipment not to exceed 20%.
(vi) Income from Export of electronics/IT hardware to be exempted from Income Tax for 10 years from the date of start of commercial production.
(vii) Promotion of Hardware Parks to be encouraged in the Private sector and given the duty free facility as well as income tax benefit under section 80IA as provided to promoters of SEZ.
(viii) For setting up of a Megafab in India, promoters to be given cash subsidy and other tax incentives as a special consideration.
(ix) Phase out of SAD being levied on imports in line with CST.
(x) Total taxation level not to exceed 17% on all electronics/IT hardware products.
(xi) Starting with assessment year 2004-05, 50% income tax exemption on profits earned from Electronics/IT Hardware Manufacturing activity. This provision would be applicable to both existing and new units.

4. Issues Related To Exim Policy
There is a need to unify investments for manufacturing for domestic and export markets. The electronics/IT hardware industry will be operating under a zero duty regime from the year 2005 onwards. This will obliterate the distinction between the domestic tariff area and exports. Since this will result in domestic manufacturer facing the challenge from zero duty imports, it has become imperative that duty structure is such that it does not put the domestic manufacture at a price disadvantage.
Following steps would be taken to encourage the domestic manufacturing:
(i) Changes suggested in the EHTP scheme:
In order that the Electronics/IT Hardware manufacturers are in a position to take advantage of the provision made in the EXIM Policy, 2002-07 with immediate effect and attract investments in this Sector, following modification in the scheme are proposed:
Para 6.9 Other Supplies in DTA: As per para 6.9(h) of the EXIM Policy, the following supplies in DTA shall be counted towards fulfillment of NFEP/EP:
"Supplies of all Information Technology Agreement (ITA-1) items and notified zero duty telecom/electronics items"
This needs to be reworded as under:
"Supplies all of Electronics and IT Hardware items, provided that the items are manufactured in the unit"
This modification in the EXIM Policy 2002-07 would not only make the indigenous hardware Industry face the challenges of zero duty regime under ITA-1 to a large extent but would help in encouraging and unifying hardware manufacturing in the country.
(ii) Products manufactured in EHTP/HMCP and other export oriented schemes should be considered at par with DTA in as much as levies of duties/taxes on domestic sales are concerned.
(iii) Duty on Domestic Sales
The EHTP/Hardware Manufacturing Cluster Parks (HMCP) should be allowed to sell in the domestic tariff area (DTA) without any restriction, on payment both of duties waived on inputs as well as all domestic taxes (excise, sales tax or composite VAT) on the output. For the purpose of levy of domestic taxes, manufacturers in EHTP/HMCP are to be considered at par with DTA units. However, in case of items on which the inputs attract higher customs duty than the finished item (a scenario arising out of implementation of ITA - I), the import duty charged on DTA sales should be on the inputs/outputs whichever is lower.
(iv) Self declaration
All clearances will be on the basis of legally enforceable undertaking (LUT) and based on self-declaration without insisting upon any a priori permits or inspections; that their actions are in conformity with the provisions of the applicable policies of the EHTP/HMC Parks Schemes; and the declaration that the goods are used for manufacture of Electronics/IT items, and will be subject to a post audit with strict and heavy punitive measures and fines for proven intentional false declaration. The physical inspection of goods, whether for import or export, into or out of EHTP/HMC Parks will not be required.

5. Hardware Manufacturing Cluster Parks (Hmcp)
Nations succeed not in isolated industries, but in "clusters" of industries connected through vertical and horizontal relationships. Supplier industries confer potential advantages in terms of ongoing coordination, as they produce inputs that are widely used and are important to innovation/upgrading.
For developing manufacturing, Hardware Manufacturing Cluster Parks (HMCP) need to be set up across the country. The HMCP would be bonded areas with each location having its own focus. Industries promoted in these parks should not be seen in isolation but in relation to each other - forward and backward linkages in the value chain. Industry clusters are an important means of achieving success in the hardware sector.
Since the potential customers/investing industries in these zones may include manufacturers with export operations, MNCs with alternate choices and their investment decisions would be based on achieving global competitiveness through their operation in such proposed cluster parks, the infrastructure in these parks should be such as to support efficiency and competitiveness with similar zones in other countries.
• The Government of India and State Government jointly have to provide impetus as well as infrastructure facilities. In the beginning, Parks may be set up where the State Government provides land of 1,000 acres or so for the Park.
• The entire park shall be a bonded area for purpose of manufacture and export. No interference from inspectors or customs. All clearance would be on self-declaration basis.
• STPI to provide the earth station or OFC link for providing connectivity to the units located under the Park.
• Labour Laws should be flexible (as discussed earlier)
• To make available uninterrupted power supply, water, telecom facilities and other infrastructure needs on shared basis by Centre, State & Private sector participation.
• The operational powers for these parks could be in the hands of Central agency like STPI.
• Built up space may be provided for incubation to the chip design/embedded software development companies.
• Single window clearance under delegated powers to the designated agency.
• Income tax benefits under Section 80 IA of IT Act for 10 years out of 15 years, and 50% tax in the next 5 years to the promoters of the Park.
6. Encouragement To Sourcing Of Locally Manufactured Products
Government buying is known to be the most significant catalyst to trigger the domestic consumption.
To encourage manufacturing in the country and help industry in ramp up their production volumes, all procurements of Electronics/IT products, which are funded by Central/State Government funds, purchase should be of locally manufactured (excise cleared) products against imported goods.
7. Upgradation Of General Infrastructure
Predictability in the movement of goods is an important factor influencing rotation of capital, conformance to delivery schedules, time to market and hence leading to customers’ satisfaction. Cost penalty arising out of various delays and need for higher inventory levels contribute to about 3.2% increase in the cost of sales. The infrastructure in terms of ports, airports, roads, power etc. must be able to support large volume of flow of goods at internationally competitive cost. The concerned Ministries/Departments must bench mark the operations of infrastructure under their administrative purview against respective international counterparts.

8. Reduction In Transaction Time
Following the Budget for 2003-04, procedures for self-assessment scheme called as Accelerated Clearance of Imports and Exports Schemes (ACS) has been notified. All the manufacturers of electronics/IT hardware industry both existing and new be covered under this scheme without any prior stipulation.
Free commercial zones would be created adjacent to the EHTP/HMCP/SEZ/EPZ to permit stock and trade thereby facilitating local availability of input material and reducing lead times and cycle times for implementing changes.
This can also be used to route DTA sales from SEZ/EHTP/HMCP/EPZ manufacturers. By doing so, these manufactures will be spared the procedural hassles related to DTA sale.

9. Supporting R&D
Strong industry - University/Research Institute linkages not only help in training for the state-of-the art technologies, but also serve as incubation ground for entrepreneurs. Establishment of such linkages would be encouraged through liberal funding.
The measures need to be taken are:
# To promote strategically relevant R&D for developing high value added products and services through both sponsored programs and also by setting up world class R&D centres. Government has to take a lead role through long term investments as well as to encourage leading companies world over to set up their R&D centres in India.
# To take initiatives for developing products and services for handicapped.
# To promote knowledge-based industries and also develop efficient production technologies for cost reduction.
# Continuous up-gradation of technologies and manufacturing process which is essential for industry’s survival in the global manufacturing environment.
# Revenue/royalty from technology export would be exempted from corporate tax as in software.
# Abolish withholding tax on export of Electronics/IT Technology.

Considering the global shifts from resources based to knowledge based digital economy, there is a need to have a separate National Digital Technology Plan identifying thrust areas on medium and long term basis to steer Indian industry in pre-eminent position in the world.
10. Marketing 'Made In India'
There is a need to project India’s strength and potential as supplier of high quality hardware at competitive costs and market India as an attractive destination for investments. Trade shows and trade delegations are a traditional form of spreading awareness. Major international trade fairs would be identified, in addition to focused trade shows in the target markets to project Indian capabilities through showcasing the success stories. For this purpose, only companies having good export track record/ international quality, safety certification etc. should participate in the Indian pavilions at such forums. Export Promotion bodies and Industry Associations participate in various trade fairs with the specific objective of export promotion, the task of showcasing Indian hardware success stories and projecting strengths in manufacturing would be handled centrally by the Department of Information Technology through a special package.

11. Encouraging Relocation Of Manufacturing Plants To India
Presence of manufacturers having global scale operations would help in development of a vendor base. Large companies, in pursuit to reduce costs and being close to their customer base are always on the lookout to leverage factor advantages of various countries. Special incentive would be offered on one time and on a short window basis to companies, which set up large operations, procure substantial inputs from local sources, develop vendor base for catering to export markets.
12. Inviting Large Ems Companies To Set Up/Augment Indian Operations
In today’s highly competitive business environment, companies are focusing on their core competencies while outsourcing everything else to an Electronics Manufacturing Service (EMS) provider. The main benefits of outsourcing include reduction in costs and investments, additional capacity, shorter time to market and state of the art manufacturing capabilities.
Global major EMS companies would be approached in a proactive manner to enthuse them in setting up/augmenting their Indian operations. Special incentives would be offered based on the value addition and volumes of exports. This will provide impetus to component manufacturers for modernizing their facilities and moving up in volumes of production.
13. Development Of Semi-Conductor Industry
The trend towards digitalization, enabling convergence of technologies is spearheaded by the developments in the semi-conductor technology. Semi-conductors today are the driving force of electronic industry and represent over 50% of the production output globally in the electronic components sector. The continuing ability to create features of smaller and smaller size is driving the trend towards miniaturization, low cost, low power consumption, low volumes and low weight electronics/IT products. Given the smaller size of the Indian market and even factoring in its growth in the coming years, it may not be possible to justify such level of investment purely based on domestic demand. In view of this, global majors with proven capabilities would be encouraged to set up plants in India. The Indian software skills would be leveraged in creating value-added products through development of ASICs.
14. Looking Beyond The Domestic Market
Indian manufacturers need to look beyond the domestic market so as to realize economies of scales. Government has declared Electronics Hardware as one of the thrust sectors. For boosting the export, following initiatives would be taken:
(i) In Electronics & Computer Software Export Promotion Council (ESC) there would be a focus on Electronics/IT Hardware export promotion. Within their existing allocations, separate funds should be earmarked for this purpose.
(ii) An export plan would be prepared in which the target country-product matrix should be identified along with the competitor’s profile. Market requirement of various countries should be matched with the products offered by the Indian companies.

(iii) In order to help the industry offer the products at par with the international prices, Govt. is offering duty exemption/drawback schemes to set off the duties and taxes, which are suffered on the inputs. The cost disadvantages arising out of high cost of finance, poor infrastructure, higher turn around time, inventory cost etc. need to be compensated suitably in addition to the reimbursement of duties/taxes.
(iv) A core group representing the concerned Ministries be set up to look into the problems of the electronics/IT hardware exporters. The group should meet at least once in a fortnight.

15. HRD In VLSI DESIGN And Embedded Software
With digitalization and convergence of technologies, new products coming to market are multifunctional, interactive, networkable and user friendly through use of embedded software. It is anticipated that in future all products would incorporate certain amount of embedded software.
For localizing the requirement of digital devices and addressing customer requirements through innovative software driven products, skills in Design and Engineering and embedded software would be required. In order to develop strong hardware base, India would need more microelectronics engineers. The training programs in this area would be suitably augmented.
16. Amending Labour Laws
Following modifications in the Labour Law specifically applicable to the electronics and IT products manufacturing sector, to be enacted with due consideration to the ILO recommendations:
(i) Women shall be allowed to work in three shifts subject to provisions of all the ILO specified conveniences including transportation from and to the doorsteps of the employees.
(ii) Temporary status will apply for 720 days out of 3 years instead of 240 days out of one year as per the existing labour laws.
(iii) Manufacturers will be allowed to downsize employee rolls by up to 10 percent of total employee strength in any year without permission.
(iv) Contract Labour Abolition Act will not be applicable to the IT Sector.
(v) In order to be able to run 3-shifts/4-shifts operations, labour law should allow upto 12 hours shifts without overtime as long as total number of hours worked per week averages the current norms of 48 hours per week.
(vi) Social security scheme linked with tenure of service be evolved jointly by Government and Industry.
17. Patenting
Due to strong competition, increasing cost of R&D and shortening of product development cycles, various countries have become strict in defense of their intellectual property rights (IPRs) concerning processes, designs, equipment devices etc.
Presently DIT is supporting IPR protection for its PSU’s, societies and grantee institutions. As the cost involved is high (Rs. 5-10 Lakhs per case) which could be a deterrent for Indian hardware companies, upto 80% of the facilitation cost of IPR protection particularly for obtaining International patent preferably through Patent Cooperation Treaty (PCT) for hardware sector would be borne by the Govt. for a period of five years.
Patent is only granted to new, novel and useful invention. As the cost and time involved in patent protection is considerable, it is a normal practice to do a preliminary prior art search before filing a patent application. Facilities for the same would be created.
18. Quality Certification
Various countries prescribe conformance to certain entry-level criteria in terms of conformance to quality, safety of the Electronics/IT products (VDE, UL, CS, IEC, CE, EMI/EMC). The industry also must prepare itself for the impending restrictions requiring eco-friendly practices. The required accredited infrastructure for testing/certification needs to be set up/augmented. The industry would be provided assistance up to 50% for the charges applicable for getting the certifications.
19. Removal Of Mandatory Customs Bonding For Electronics And It Units
Mandatory customs bonding creates hurdles in the smooth operation of Electronics and IT units operating under Export Oriented Schemes (STP/EHTP). For the purpose of applicability of Sections 10A and 10B of the Income Tax Act, such units may be treated as notionally bonded.
20. Rate Of Depreciation
At present the Income tax rules provide 60% depreciation on computers on an annual basis. For increasing PC penetration and taking into account the high rate of obsolescence in this industry, computers would be allowed 100% depreciation.
Under schedule 14 of Company Law Board, presently depreciation on machinery for production of Electronics and IT Hardware is 15.62% (on single shift basis). Considering the fast technological obsolescence in this sector and need for the industry to upgrade its capital goods, the depreciation rate would be increased to 30%.

21. Procurement/Rewarehousing Certificates
For import of items, STPI issues Import Certificate on the basis of which a Procurement Certificate (which is just an endorsement of the Import Certificate) is issued by Customs & Central Excise Officer. Similarly, when the goods arrive, the customs official has to inspect the goods at the airport and again at the bonded warehouse and issues Re-warehousing Certificate before the goods are used in the production process. The issue of "Procurement Certificate" and "Rewarehousing Certificate" take time because of non-availability of field staff/signing authority, weekend, holiday etc. As per the circular issued by CBEC, customs are working for 7 days a week and 365 days a year at major ports, but such types of problems have been reported by the units now and then from smaller towns. These small hindrances discourage the exporters/importers to look for alternate locations away from the Metros. This needs to be dispensed with.

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