Taxation Policies affecting the growth of domestic Indian IT Industry

Taxation Policies affecting the growth of domestic Indian IT Industry

Co-authored with Arijit Sen and Parminder Singh

Background

One of the alarming implications of India Tax system that is crippling manufacturing of Information Technology products in the country is the Inverted Duty structure. The present rates of SAD in Information Technology components increase the cost of a finished computer or laptop that is manufactured in India as compared to a direct import due to an inverted duty structure. Most components of computers like motherboards, cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of 14.73% as against 10.3% CVD for finished goods.  On some components like microprocessor, hard disc drive attract 5% CVD and nil SAD.

The total input duty on components is higher than the output duty on the finished product or duty on imported Finished Goods. The higher duty directly leads to a higher cost for manufacturers in excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in DTA areas, there is overflow of input credit due to higher input tax versus output tax which again adds to the cost.

IT companies that have established large manufacturing facilities in India that manufacture information technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production in turn leads to further higher manufacturing cost.

The inverted duty handicap for IT manufacturing Industry has turned down the morale of other component manufacturers who want to set up their manufacturing base in India despite notification of incentives and schemes for IT manufactures including M-SIPS and National Manufacturing policy.

Impact of CVDs on imported finished IT products on Domestic IT manufacturing

Countervailing Duty (CVD) levied under section 3 (1) of the Custom Tariff Act is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product, had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty payable. If CVD on imported finished IT products is equal to excise duty levied on a like product manufactured or produced in India, it brings the cost of imported PCs on par with locally manufactured ones. Current rate of CVD on imported finished IT products is 10.3% which is equal to the excise duty levied on manufactured IT products in India.

Impact of CVD on imported components on Domestic IT manufacturing

Domestic manufacturing is impacted by the CVD on imported components. Even if PC manufacturers  absorb the cost, a negative impact on pricing will exist between the imported and locally manufactured product. The current rate of CVD on most components of computers like motherboards, cabinets, memory modules, graphic cards is 10.3%, whereas the current rate of CVD on some imported components of computers like Microprocessor for computer, other than motherboards, Floppy disc drive, Hard disc drive, CD-ROM drive, DVD Drive/DVD Writers, Flash memory and Combo drive is 5.0%

Factoring in the Special Additional Duty (SAD)

Special Additional Duty of Customs is imposed at the rate of 4% in order to provide a level playing field to indigenous goods which have to bear sales tax. The current rate of SAD to specified parts of personal computers viz., Microprocessor for computer, other than motherboards, Floppy disc drive, Hard disc drive, CD-ROM drive, DVD Drive/DVD Writers, Flash memory and Combo drive is 0.0%, while the current rate of SAD on most components of computers like motherboards, cabinets, memory modules, graphic cards is 4.0%

Burden Imposed on Manufacturers by the Present Duty Structure in India

The present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India as compared to a direct import due to an inverted duty structure. Most components of computers like motherboards, cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of 14.73% as against 10.3% for finished goods.  On some components like microprocessor, hard disc drive attract 5% CVD and nil SAD.

The total input duty on components is higher than the output duty on the finished product or duty on imported Finished Goods. The higher duty directly leads to a higher cost for manufacturers in excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in DTA areas, there is overflow of input credit due to higher input tax versus output tax which again adds to the cost.

As a result, IT companies that have established large manufacturing facilities in India that manufactures information technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production in turn leads to further higher manufacturing cost. This in turn has turned down the morale of other component manufacturers who want to set up their manufacturing base in India.

Proposed Fiscal Policy Changes to Achieve the Manufacturing Goal of the Government of India

The Indian government recognizes that for India, it is a must to increase the share of manufacturing in the nation’s GDP to at least 25% and create opportunities for approximately another 100 million citizens who will be joining the work force by 2020. As such, from a taxation perspective, a clearly defined policy is required that allows existing mother plants to be able to operate at their full capacities with  support from Government in terms of being deemed as Brownfield Clusters and given MSIP benefits that the government has outlined through the triad of policies in 2012. This will boost the investment sentiment of other component manufacturers to invest in India. Once the mother plants are operating at full capacity, the Government needs to engage with component suppliers so that a sustainable component eco-system is created in the country.

Specific tax policy changes that would promote domestic manufacturing in India

1)     Exemption from CVD on 7 components of Computer - microprocessors for computers other than motherboards, floppy disc driver, hard disc drive, CD ROM drive, DVD drive / DVD writers, flash memory and combo drives meant for fitment inside the CPU or laptop, etc which is an additional cost to manufacturers of IT goods in Uttarakhand.

2)     Removal of SAD on other components that attract CVD of 10.3% and SAD of 4%, as duty on components is than duty on finished goods for manufacturing units based in Uttarakhand.

3)     No additional tax burdens on any of the components of IT manufacturing in order to prevent Duty Inversion in DTA zones.