Budget 2014-15 provided the much-needed relief to domestic manufacturers of personal computers and tablets by addressing the issue of inverted duty structure. However, only partial relief has been provided to the IT hardware manufacturing industry in limiting the exemption from special additional duty (SAD) to inputs/ components used in the manufacture of personal computers and tablets. So the benefit of SAD exemption does not extend to other ITA goods (goods covered under WTO Information Technology Agreement) where the issue of inverted duty structure continues.
The impact of the inverted duty structure is such that it effectively makes direct import by end customers or trading (i.e, import and sale) of IT hardware/ ITA goods far more advantageous than local manufacturing, thus, making India manufactured goods uncompetitive for the domestic market.
Further, lack of clarity on the extension of the benefit of exemption up to the sub-component level has not completely mitigated the costs being incurred by a domestic manufacturer of personal computers and tablets.
It is suggested that the benefit of SAD exemption may be extended to all goods (including inputs, components and accessories as well as their parts and sub-parts) when imported for use in the manufacture of ITA goods. This suggestion, if implemented, should provide the necessary impetus to domestic hardware manufacturers by eliminating additional tax/duty costs incurred on account of an inverted duty structure.
Abatement under MRP-based valuation
Maximum retail price-based valuation was prescribed under the central excise law with the intent to ensure revenue neutrality without increasing end user prices.
Since the introduction of MRP-based valuation on IT products in 2008, the percentage of abatement has been lowered from the initially prescribed 22.5% to 20%, with no escalation in the quantum of abatement later. A key reason for abatement reduction was a reduction in the median rate of excise duty from 12.36% to 10.3%.
While the total post manufacturing cost typically accounts for over 40% of the sale price, the abatement percentage prescribed at 20% is much lower than the costs incurred.
It is suggested that the rate of abatement on all IT products should be increased to 40%.
Deemed export benefits on ITA goods
ITA bound goods (including their components when imported for use in manufacture of ITA goods) are exempted from the basic customs duty (BCD) when imported into India. A domestic manufacturer of ITA goods shall be liable to pay excise duty at 12.30% on clearance of the manufactured goods to customers in India. There is also a levy of VAT/ CST on the domestic sale of goods manufactured in India. It is suggested that ‘deemed exports’ status be provided to ITA bound goods to help domestic hardware units.
In the absence of definition of the term ‘computer and computer peripherals’, a large number of ITA products do not enjoy the accelerated rate of depreciation. All ITA products have approximately the same life cycle as ‘computers and peripherals’.
The depreciation rate prescribed for capital goods is very low. It takes five for these products to achieve full depreciation. But the life of most IT products are less than that.
It is recommended that a definition of the term ‘computer and computer peripherals’ be inserted in the Cenvat Rules to include all ITA bound products inter alia specifically including network and testing equipments.
The author is executive director, MAIT