Ahead of the Union Budget, India Electronics and Semiconductor Association (IESA) has asked the government to implement GST and remove anomalies in inverted duty structure for the electronics hardware industry.

IESA President PVG Menon said, “Building the domestic electronics industry is a very important item for national agenda, from security, self-reliance as well as future business potential. Since the domestic industry has fallen behind in this sector and is importing several billions of dollars of products and equipment every year, there is an urgent need to take actions to stimulate the domestic electronics industry and build India brand by encouraging locally designed products for local and global markets.”

Encouraging domestic electronics manufacturing and product development

A. Correction of anomalies in taxes and duties
Speedy implementation of GST: Urgent implementation of GST (Goods & Service Tax); Rationalised indirect tax structure of 12 per cent GST (8 per cent Excise + 4 per cent VAT) on electronics manufacturing value chain

Correction of inverted duty structure: Anomalies in inverted duty structure should be removed; Finished electronic product import should be subject to 10 per cent Customs Duty to encourage local manufacturing.

Total Exemption from Service Tax for SEZ: Total exemption from Service Tax for SEZ has been restricted to only those services rendered inside SEZ. Services rendered outside SEZ come under the scheme of refund by the Government. In order to obtain the refund, there is a cumbersome procedure and slow process, under which one has to submit all original supporting documents to the concerned authorities. It is suggested that units in SEZ be totally exempted from Service Tax.

B. Status of physical exports to locally manufactured ITA-I products sold in India
With signing of the ITA-I agreement, customs duty on 217 tariff lines were brought to zero over a seven year time frame of 1998-2005. As the duty on inputs required for manufacture of these 217 tariff lines were reduced gradually, industry suffered on account of incidence of inverted duty structure for a prolonged period. These years have seen erosion of ICTE manufacturing in the country and closure of number of units. Several others have shifted from manufacturing to trading.

Additionally in the recent years customs duty on number of Consumer Electronics items has been reduced to zero in pursuant of the FTAs entered into with certain countries.

As per para 6.9(g) of the Foreign Trade Policy, supplies of Information Technology Agreement (ITA -1) items and notified zero duty telecom /electronics items effected from EOU / EHTP / STP units to DTA are already counted for fulfilment of positive NFE. Such supplies should be eligible to full physical export benefits.

Supply of ITA-1 products by DTA units into the domestic market should also be eligible for physical export benefits, and should be extended the following benefits to promote domestic electronics manufacturing:

—Refund of duties suffered

— Incentives under the Focus Products Scheme and

— Income Tax benefits

C. Creation of fund to reduce disability costHigh cost of finance, power, logistics and procedural transactions add to disabilities. This discourages investments in electronics manufacturing, which require large and long term investments necessitating a supportive fiscal and infrastructural environment.

It is suggested that a fund be created to provide 4 per cent interest subvention for the working capital and term loan requirement of the ICTE sector. Besides, the procedural delays should be reduced and made simpler, which can reduce the transaction costs.

Proposals relating to Semiconductor Design

A. Incentives for R&D

As you may be aware, the Electronic Systems Design & Manufacturing (ESDM) industry presents a Rs.21.86 lakh crore ($400 billion) opportunity by the year 2020. Semiconductors are finding increasing proportion of the Bill of Materials (BoM) of the electronic products.

Semiconductor design, itself, is projected to be a Rs.3.01 lakh crore ($55 billion) market by the year 2020 and is listed as one of the key objectives under NEP-2012. India has emerged as one of the leading countries in the semiconductor design, with 23 of the top 25 MNCs having their design centres in India. Besides, several Indian companies and start-ups have made their mark in this segment.

Indian semiconductor design companies (fabless companies) in India are now engaged in high end design. While we have lagged behind in semiconductor manufacturing, we can leverage our existing strengths in semiconductor design to become and maintain leadership position in this segment. The semiconductor design industry generated revenues of Rs.48,087.43 crore ($8.8 billion) in the year 2011 and has witnessed a robust growth of 17.3 per cent since the year 2009.