ELCINA’s Pre Budget 2016-17 Expectations

Author(s): 

New Delhi: A special policy dispensation has been provided for promoting SKD assembly of Mobile Phones & Tablets by way of 11.5% & 10.5% differential Excise Duty respectively with involves less than 6% value addition. ELCINA recommends that atleast 10% benefit be given to manufacture of Components, PCBs, Parts, Raw Materials and SMT Assembly (PCB Population by EMS companies) which entail between 15 - 50% Value addition and create far more value and employment benefits as well as potential for R&D and Technology absorption for establishing a sustained ESDM manufacturing eco-system. The current surge in SKD assembly of Mobile Phones is certainly encouraging but could collapse if the supply chain is not developed aggressively.

It is very important to provide policy support for other sectors of Electronics, particularly LEDs, IT Products, Strategic Electronics, Industrial Electronics, Security products, Solar Energy products, Medical Electronics and others, all of which have huge potential for value added manufacturing. ESDM Policy must be directed towards supporting value addition and not only SKD assembly which is attractive and an easy option for the short term but provides little benefit in the long run.

Salient points:

1. Recommendations on National Policy on Electronics (NPE) 2012
M-SIPS and EMC Schemes are the two pillars of NPE 2012 which have successfully attracted investment in Electronics Manufacturing Sector. Implementation of both the schemes has been put on hold since early 2016, ostensibly due to questions from Finance Ministry regarding their effectiveness and the financial liability imposed on the Government’s resources.
In the interest of Make in India and the electronics manufacturing sector, ELCINA’s considered recommendation is as follows:
a. MSIPS
Projects approved or under approval under M-SIPS must be supported without delay as a number of valuable investments in manufacturing are held up or may not see the light of the day. Upper limits may be defined for each product segment of ESDM sector covered under MSIPS. More than 95% of the investment proposals are below Rs 1000 crores and possibly over 90% below Rs 500 Crores which if implemented will greatly strengthen the ESDM value chain and enhance local value addition, a dire need of the industry.
Typically the MSIPS subsidy is recovered within 1-2 years of commencing operations from the tax revenue generated by it. Disbursement of incentives towards projects already approved and investments already made must be released without delay as it is causing serious trust deficit among investors.

b. EMC Scheme
EMC Scheme was formulated to provide a supportive & efficient infrastructure for electronics manufacturing. In all countries where ESDM sector has developed well, modern infrastructure is provided beforehand and this is possible only if Government is involved in these projects providing the land, long term finance and statutory approvals/licences/permissions by the State

Government. This will reduce financial pressure on the Private Developer/Industry and provide ample time for development work to be completed. Industry will invest only once the Electronics Cluster Parks are developed. Necessary modifications may be made in the Scheme Notification and Guidelines to make it successful.

c. Preferred Market Access (PMA) under the NPE 2012, for preference to domestically manufactured electronic products across Central & State Government purchases was announced on 23rd Dec 2013. Currently the PMA covers only the Central Government purchases. It is suggested that the Scope of PMA to be extended to cover State purchases as well and procurement of items, for which PMA guidelines have been notified by MeitY, should be done as per the guidelines during the tendering process.

2. Mitigating Cost of Disabilities:
In India, high cost of Finance, Power and Logistics/ Regulatory and Procedural problems in India add to disabilities typically estimated at 8-10% for components and any high value added manufacturing in ESDM Sector.
The following methods are recommended to mitigate these disabilities and enable higher investments & value addition:
a) Production Subsidy: Provision for a 10% Production Subsidy on the value addition by the manufacturing unit has been introduced under the MSIPS Scheme on 3rd August 2015 including high value added items such as semiconductor wafering, logic microprocessors, IC’s and added new components such as PCBs, discrete semiconductors fab, Power Semiconductors Fab and ATMP etc. Urgent implementation of this is recommended.
ELCINA recommends that this Production Subsidy is extended to include all components & raw materials which are covered under ITA-1. EMS companies are playing a vital role in the ESDM Value chain and encourage local manufacturing, value addition and demand for local components and raw materials/parts. It is recommended that output from EMS companies is included in this Production Subsidy.
b) Benefit through Direct Tax: Finance Cost, Energy Cost and Logistics/Transportation are the three main measurable contributors to disability costs. It is recommended that weighted deduction in respect of Interest paid, Power cost and Freight in proportion to the disabilities is provided for as a deduction in Profit Before Tax (PBT). These are auditable costs and are included in Statutory Financial Statements of companies. Thus allowing 2x (double) deduction while computing taxable income would set off 2/3rd of the disability cost if we assume 33% as Corporate Tax.

3. Continue all differential duty benefits and concessions under GST Regime:
Consistency in tax policy is very important for attracting investments. The Differential excise duty structure as provisioned in the Union Budget 2015-16 on Mobile Handsets and Tablets has met with encouraging response from the industry. Many companies have set up manufacturing facilities for mobile handsets while some have taken the EMS route for domestic manufacturing. Following this success, its scope was widened to cover Mobile Chargers, Battery Packs, Speaker Headphones and specified CPEs, including CCTV, DVR/NVR, Set Top Box in the Union Budget 2016-17. However this has enabled SKD assembly only.

ELCINA recommends that the scope of Differential excise duty be extended to all ITA-1 products with the objective of encouraging the use of domestically manufactured components, parts and consumables. Products covered under Differential Excise Duty structure may be brought under a Phased Manufacturing Program with progressively increasing local value addition.
5. Other Recommendations:
a) Cover all all ICT and Electronic products under preferred rate in the GST regime and reduce CGST to 6% on inputs used in manufacturing ITA-1 products. Refund of CGST on domestic inputs is also suggested above in 3(b, ii).
b) Venture Capital Fund for ESDM Sector: Recommended as necessary step to attract low cost investments in Electronics Manufacturing. Total investments in electronic industry are envisaged at USD 100 Bn (INR 6.5 Lacs). This is a distant possibility unless a Venture Capital Fund exclusively for investing in Electronics Manufacturing units is established and contributors to this fund offered Tax pass through benefits on dividend income as well as capital appreciation. Indian HNI’s and NRI’s must be invited and encouraged to invest in this Fund/s.
c) Promotion of "Make in India" by imposing peak rate of Customs Duty on non-ITA-1 items which are at zero duty. Further registration of goods must be made mandatory under BIS/IEC norms under the Compulsory Registration Order 2012 which is already in operation must be expanded to include more ESDM products.

Date: 
Tuesday, December 13, 2016