1. Budget 2018: Make In India or FDI, will Modi government listen to domestic electronics manufacturers’ request?

Budget 2018: Make In India or FDI, will Modi government listen to domestic electronics manufacturers’ request?

Budget 2018: On February 1, finance minister Arun Jaitley will present one of the most important budgets during the tenure of BJP government. This budget comes after the implementation of the much talked about Goods and Services Tax and comes before the 2019 Lok Sabha Elections.

New Delhi | Published: January 27, 2018 3:43 PM
Budget 2018: On February 1, finance minister Arun Jaitley will present one of the most important budgets during the tenure of BJP government. Budget 2018: On February 1, finance minister Arun Jaitley will present one of the most important budgets during the tenure of BJP government.

Budget 2018: On February 1, finance minister Arun Jaitley will present one of the most important budgets during the tenure of BJP government. This budget comes after the implementation of the much talked about Goods and Services Tax and comes before the 2019 Lok Sabha Elections. Hence, the budget 2018 expectations from the general public and various industry leaders will be tumultuous. Voicing their concerns are the domestic electronic manufacturers about the Union Budget 2018.

With increased focus on ‘Make In India’, the domestic manufacturing industry is expecting incentives around indigenous manufacturing this Budget. While domestic industries located in designated areas and export-oriented units have been extended with incentives such as reimbursement of GST paid, duty credit scrips etc., by and large, implementation of GST has resulted in a seamless credit of taxes paid on procurements to manufacturers and traders alike, thereby deterring the domestic manufacturing industry.

Competitive pricing offered by global players especially in the electronics sector has enticed businesses to import goods vis-à-vis domestic manufacturing/ sourcing. Furthermore, the government recently allowed 100% FDI for single-brand retailers via automatic route and has also relaxed the mandatory 30% domestic sourcing norm in Foreign Direct Investment (FDI) regulations, which has further spurred imports.

However, a ‘non-creditable’ Basic Customs Duty (BCD) is levied on most of the imports adding to the cost of import of goods and thus providing a level-playing field to the domestic industry. To circumvent the applicability of BCD, export-oriented businesses set up their units in Special Economic Zones (SEZs) entitling them to procure goods duty-free. To shun abuse of the benefits offered, clearance of goods by SEZ units to the Domestic Tariff Area (DTA) is subjected to BCD in addition to GST, resulting in increased procurement cost for customers, and thereby safeguarding the interest of manufacturers in DTA.

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India being a signatory to the Information Technology Agreement (ITA) of World Trade Organization, products covered under the ITA are allowed be imported duty-free. Also, domestic clearance of ITA goods by SEZ units are considered as deemed exports and not subjected to BCD as against non-ITA goods. However, while ITA products are generally zero-rated under Customs, BCD of 15% has been recently imposed on mobile phones on the government’s contention that the same are not covered under ITA.

Domestic industry intending to set up units in SEZ are seeking clarity on whether mobile phones cleared from SEZ units to DTA units would continue to be eligible for Net Foreign Exchange benefit and consequential duty-free DTA clearances. Such units are also seeking exemption from the direct tax ‘sunset clause’ ending in March 2020, for setting up of units in SEZ. The units fear they may be treated at par with DTA units for paying corporate taxes thereafter.

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Besides, in 2017, the government levied a BCD of up to 15% on import of specified electronic products such as monitors not covered under the ITA, as the domestic information and communication technology manufacturing industry was severely hit by competition from importer-traders of such products. Even then, the industry did not see any major investment in the country. Though mindful of India’s WTO commitments on phased BCD reductions, the domestic manufacturing industry is seeking additional import measures on imported finished products and further, levy of BCD of up to 15% on electronic components to promote indigenous manufacturing of electronic products including its components.

The industry is also seeking levy of duty on import of all technology products which are not part of the ITA signed by India. Also, the industries located in excise-free zones availing benefits of area-based exemption under the erstwhile regime are seeking for an increase in the percentage of GST incentive offered to them in the form of reimbursement of CGST paid in cash from 58% to 100%.

Additionally, the electronics sectors are also seeking to lower of GST rates on their products. Manufacturers of tablet PCs, especially the low-cost educational tablets, are urging a reduction in GST rate from 18% to at least 12%, if not lower. Earlier, such devices attracted sales tax in certain states at 5%, which was even waived off in certain states to boost ‘Make In India’. Even under the GST regime, states such as Uttar Pradesh and Gujarat are aiming to cater to the increasing demand for electronics in the country and to become global electronics manufacturing hubs by extending various incentives such as capital subsidy, interest subsidy, exemption of stamp duty, reimbursement of SGST paid on intra-state transactions etc.

It remains to be seen if Budget 2018 pays heed to the pleas of the domestic electronics manufacturers and incentivizes the domestic electronic industry to achieve the agenda of “net zero imports in electronics by 2020”.

Written by Abraham Kuruvilla – Senior Director, Rashmi S – Director and Dhanashree Nayak – Deputy Manager, Deloitte Haskins & Sells LLP.

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