From what the electronics and IT secretary has said to the media, the government appears convinced that if Apple is to do serious manufacturing in India, it has to be allowed to import some part of its components duty-free, at least till the time it is able to source/manufacture them in India. The tone of the secretary’s comments suggests the government is working hard to find what it calls ‘common ground’ to enable to the US MNC to set up shop here. To be sure, if Apple does start manufacturing its phones in India, as opposed to having just an assembly line, it will be a big positive and the duty concessions may well be worth it.
But keep in mind that, under the phased manufacturing programme (PMP) the government is working on, the plan is to increase value addition for all players—that is, to move them away from the current assembly-line operations. Under the plan, domestic value addition is to rise to 39.6% of the value of the finished phone by 2019 in the case of smartphones and 58.3% in the case of feature phones. So, if Apple has to get additional concessions such as duty-free imports, other than those given to all handset manufacturers, this can only be allowed if its indigenisation is to be faster—and that concession, too, has to be available to others as well.
Even before the government finalises its stand on Apple’s demands, it needs to sort out issues relating to the sops for manufacturing in India. While an 11.5% duty differential was a good reason to start assembling phones here and gradually increasing the local value addition, none of this is possible in the post-GST regime. One possibility being talked of is to hike the import duty on phones/components—currently, the import duty is zero but the countervailing duty is 12.5% for non-manufacturers and 1% for manufacturers. Doing this could be a problem since India is a signatory to the Information Technology Agreement (ITA) which proscribes any import duty—the government, though, feels that ITA can be got around since it does not include smartphones. So, before doing this, the government needs to be very sure this is possible. Another possibility is for the government to compensate manufacturers by refunding them directly—the states where manufacturers are located will also need to chip in since the central government will get just half the 18% GST on handsets, and that won’t be enough. The other option is to give the electronics ministry a budget allocation every year to make these payments. Before global players see a clear tax structure in place, they would be hesitant to set up a full-fledged manufacturing unit.