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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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Independent Non-Executive Directors Become The Directing Mind
And Will Of The Corporation?
