Over the years, Indian manufacturers have built the capabilities, expertise and capacities to manufacture world-class IT products; however, their strengths and abilities have remained underutilised due to the prohibitive taxation policies and a neglect towards ecosystem development. The government now has to look at some pertinent regulatory and operational issues, simplify procedures and tax structures, and take concrete measures to create a truly conducive environment for the business to grow. We have to build a complete ecosystem with a robust infrastructure, supply chain and a favourable regulatory environment. Towards that, campaigns like Make-in-India and easing doing business in India, which aim at creating an investment-friendly environment and strengthening our production potential, have set the right tone.
Some important reforms are needed in Budget FY17 to give the right push to the domestic IT hardware industry. For example, the recommendation to create duty differentials by extending duty incentive schemes given to mobile phones and tablets to all the Information Technology Agreement (ITA) goods would be a major booster to the domestic IT hardware manufacturing. There are several other measures needed.
* Righting duty differential anomalies: In the Union Budget FY16, the excise duty for mobiles was reduced to 1% without Cenvat credit or 12.5% with Cenvat credit, giving domestic manufacturers a benefit of about 11% over imported phones. IT equipment makers are seeking extension of this differential duty incentive to other categories of electronic products, i.e. all ITA goods including laptops, desktops, personal computers and e-readers; wired and wireless customer premises equipment like routers, modems, access points, networking switches and adapters; and surveillance equipment like CCTV cameras, IP cameras, etc. This will significantly benefit domestic manufacturers and enable them to utilise their capacity to the maximum.
* Giving a boost to domestic IT production and exports: The government has to take some concrete steps to increase exports of IT and electronic goods. The government must also increase export incentives under the Merchandise Exports from India Scheme (MEIS) and provide ‘deemed exports’ status to all ITA-bound goods. This will reduce the tax burden and promote domestic hardware manufacturing. The rise in exports will build the economies of scale required to attract and sustain the electronic component industry.
* Convergence cell for product classification: IT products get introduced in the world market on a daily basis and are imported into India. In order to avoid confusion in litigation and unwarranted harassment by customs officials, a convergence cell must be formed, wherein classification of new IT products should be decided within 30 days of representation.
* Reduction in cost of IT products for end-users: The cost of products can be significantly brought down by streamlining existing duties and incentives. For example, the prevailing rate of abatement on IT products is much lower than the cost incurred in manufacturing, which has resulted in increase in price at the hands of end-customers. It must be risen from the current rate of 20% to 40%. Tax depreciation rates on computers, software and other IT accessories also need to be increased to align them better with the rate of obsolescence. This will significantly bring down costs, thereby spurring more investment.
* Support for small and medium enterprises: SMEs have to face various operational challenges in terms of regulatory issues, availability of finance, lack of infrastructure facilities and distribution networks. Apart from tax incentives, the government can provide them an exclusive online platform for buying and selling of products.
* Tax exemptions and rationalisation to improve competitiveness: In order to encourage domestic manufacturing, the government has to give duty exemptions on import of components and support new manufacturing units with tax holidays and excise exemptions. We have to rationalise tax structures to avoid double taxation (VAT and service tax) and relax Cenvat restrictions to improve credit access for certain services.
The government has made a great beginning by launching initiatives such as Make-in-India and Digital India.
However, these initiatives need to be supported with a complete ecosystem that promotes growth. Given the right environment to grow, the domestic IT manufacturing industry can surely play an increasingly important role in ensuring the success of these campaigns.
The author is executive director, MAIT (Manufacturers’ Association for Information Technology)