Budget fails to live up to the expectations of electronics industry

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By Srabani Sen

The electronics industry expressed its disappointment over the Budget proposals for 2011-12 as Finance Minister Pranab Mukherjee failed to announce some major policies that the industry was expecting for its development. The SIP II policy that was to encourage domestic fabrication of semiconductors and setting up of ATMP units were the two major expectations. The industry was also anticipating the announcement of a National Electronics Mission with a corpus for the development of the electronics sector. However, no such policies were announced by the finance minister.

While the Budget did not live up to the expectations of the electronics industry on certain fronts, it evoked mixed reactions.

LED sector: Much more needed

The Budget showed a strong leaning towards promoting green technology. As part of the promotion of energy efficient lighting solutions, the excise duty on LEDs (a key component in LED lighting) has been reduced to 5 per cent and the countervailing duty (CVD) of 4 per cent has been totally done away with. “The Indian LED lighting market has the potential to surpass US$ 400 million by 2015 and the need of the hour is to give an increased impetus to the local manufacturing of LED lights and luminaires,” opines Deepa Doraiswamy, industry manager, electronics, Frost & Sullivan.

The reduction in excise duty on LEDs may encourage more indigenous manufacturing of LED lighting and its wider adoption in automobiles, railways, street lighting and consumer lighting.

However, industry players are not satisfied with such small offerings. “Although the government has tried to promote green power and energy conservation, this is too small a step. If the government is really serious about a green revolution, then it should have provided major benefits in terms of reduction of taxes, and incentives to solar energy and LED players,” says RK Bansal, managing director, Uniline Energy Systems Pvt Ltd.

According to Ajay Goel, CEO, Goldwyn Ltd, the best solution would have been to remove the excise duty of 4 per cent on LED lights completely. Earlier, the input duty was 8 per cent of the finished goods’ price and the output duty was only 4 per cent.

The LED sector believes that the duty cut will help to bring down prices but not to the levels that might increase consumer acceptance. “At the most, it will find wider acceptance in the high income homes and enterprises,” says Anil Gupta, joint managing director, Havells India.

MV Ramana Rao, managing director, MIC Electronics, also feels that though these steps are certainly in the right direction, much more needs to be done to bring this new technology to affordable levels. Last year, the government had reduced the central excise duty on LED lights from 8 to 4 per cent.

According to ELCINA, the Budget reforms are not in favour of the electronics hardware industry. “Some adjustments have been done by imposing, reducing or eliminating customs and excise duties on IT products and inputs for mobile accessories as well as ecofriendly products such as LEDs, solar lanterns and solar cells. This is important but certainly not enough,” says Rajoo Goel, secretary general, ELCINA.

Solar industry disappointed

The Budget has also announced reduction of customs duty on solar lanterns to 5 per cent from the existing 10 per cent, to boost the use of green technologies. Further, the basic customs duty on a few more inputs used in the manufacture of solar modules or photovoltaic (PV) cells has also been done away with. This may give a fillip to the usage of solar lanterns with LEDs in various rural regions across India. The excise duty reduction will also ensure reduction in the manufacturing costs of these solar lanterns and their retail price, thus making it more affordable for rural consumers. Increased consumption will result in higher demand for solar cells and panels.

However, the solar industry is disappointed. According to industry experts, reduction of customs duty is not of much use. It will not play a major role because as per the national policy, there are several restrictions on solar imports. So, the manufacturers are not relying entirely on imports. Further, the industry feels that since these solar products are produced across India in big numbers, there is no need to import. “Duty reduction for solar lanterns is unfortunate for Indian manufacturers and particularly the SMEs,” says K Subramanya, CEO, Tata BP Solar India.

Moreover, the increase in the Minimum Alternate Tax (MAT) to 18.5 per cent is, again, a disappointment for the solar sector, which is still in its infancy stage. It may affect the thin returns of the SMEs. The sector had also expected the government to set up a solar bond fund to support large scale deployment of solar plants to facilitate debt financing for these plants.

Similarly, the Manufacturers’ Association of Information Technology Industry (MAIT) said it was ‘extremely disappointing’ that the bulk of the electronics manufacturing sector would continue to see an exposure to special additional duty (SAD)—a 4 per cent duty that promotes imports at the cost of manufacture. “By not addressing a long standing demand of the industry, another year is lost for a breakthrough in manufacturing in India,” says MAIT executive director, Ashwini K Aggarwal.

The industry had eagerly hoped for removal of CST and SAD. CST is imposed on local manufacturers and is particularly injurious for electronics manufacturers because the manufacturing value chain is long and it adds up at each stage. “ELCINA sincerely wishes that CST is removed, at least on ICT products and components which are at zero customs duty. SAD was originally meant to support manufacturing by compensating it for local taxes which are not levied on imports. With refund of SAD allowed to importers, this tax has lost its purpose and is, in fact, counter productive,” opines Rajoo Goel.

SEZ under MAT: A setback

The proposal to levy a minimum alternate tax (MAT) of 18.5 per cent on the book profits of special economic zone (SEZ) developers and units was taken as a setback by the industry players. Experts termed this step as ‘retrograde’ and said that it would discourage investments in SEZs. “The imposition of MAT on SEZ developers and units will have a very negative impact on the newly formed SEZs. Since new SEZ units will not come up, it will prove to be a disaster for SEZ developers,” says Ajay Goel.

The new Budget proposal will basically diminish the benefits that SEZs offer. However, as a relief to the zones, a new scheme is being introduced by which units in SEZs will be able to obtain tax free receipts of services wholly consumed within the zone and get their refunds in a much easier manner.

Both the developers as well as units in these tax free zones were earlier exempted from MAT under Section 115 JB of the Income Tax Act. Exports from SEZs contribute about one-third of the country’s total exports.

All is not gloomy

As mentioned earlier, the Budget has evoked mixed reactions. Some industry experts saw the ‘limited’ Budget proposals as positive signs for the electronics industry.

According to Ganesh Guruswamy, vice president and country manager, Freescale Semiconductor India, the Budget is encouraging. “The formation of the National Innovation Council and the State Innovation Councils to prepare a roadmap for innovations in India is a welcome move,” he says. The expected government funding through these councils will provide an impetus to R&D in the semiconductor industry. “The impending launch of the National Mission for Hybrid and Electric Vehicles, in collaboration with all stakeholders, will also create long term benefits for the semiconductor industry,” he adds.

Move to make manufacturing competitive

Sandeep Nair, president and managing director, Emerson Network Power, believes that the government acknowledges the significance of the manufacturing sector and is keen to make the sector competitive. “The government intends to increase the manufacturing sector’s contribution to the Indian GDP from 16 per cent to 25 per cent over the next decade, which is an encouraging move and will benefit the economy, both in terms of employment and self-sustenance. The commitment to simplify the processes of procurement, pricing and imports/exports is a welcome move. But the challenge lies is the execution,” says Sandeep Nair.

Ramesh A Vaswani, executive vice chairman, Intex Technologies, however, sees this estimation of the manufacturing sector’s contribution to GDP increasing from 16 per cent to 25 per cent over the next decade as a very conservative target. “The finance minister has not rolled back any stimulus measures and this augurs well for maintaining the growth momentum in local manufacturing output and customer demand,” he states.

Handsets: Duty exemption welcome

The Budget has also announced an extension of the exemption from special additional custom duty (SACD) for parts imported to manufacture mobile phones and accessories till March 2012. The handset market in the country is continually growing and the level of indigenous manufacturing is also on the rise. Considering these, extending the period for the duty exemption will encourage more local manufacturing. Similarly, the reduction in duty for parts used in printers (inkjet and laser) manufacturing is also likely to have a positive impact as it would increase local manufacturing.

Green signal for green cars

Components in hybrid vehicles got a custom duty waiver, and to encourage domestic production of such components the excise rate has also been lowered to

5 per cent. “This is expected to drive the local production of electric vehicles, as OEMs will strive to derive the benefits from the national mission as well as the duty reduction. India could develop into an Asian hub for electric vehicle manufacturing if the right incentives are offered to the manufacturers through the mission,” points out Deepa Doraiswamy.

Local production, in turn, will create an increased demand for the electronics and semiconductors that are consumed in electric vehicles and thus boost the local electronics market. “The automotive companies will go ahead with their expansion plans, thus calling for investments in plants and new lines. This will create new demand for automation systems across OEMs and ancillary units,” opines Niju V, deputy director, automation and electronics, South Asia & Middle East, Frost & Sullivan.

Budget favourable for MSMEs

One of the key expectations of the MSMEs, that the Budget would simplify the tax procedures for small businesses, was met. MSME players appreciated the allocation of Rs 50 billion to SIDBI for refinancing incremental lending by banks to micro, small and medium enterprises. Presently, credit is the main challenge facing Indian MSMEs.

Lowering the surcharge tax limit on corporate tax to 5 per cent will also help the small and medium businesses who will be able to use the capital for further expansion.

Though the government has identified the need to promote green energy by announcing a mission for hybrid/electric vehicles, it is rather unfortunate that the potential for the electronics industry to be an enabler for GDP growth has still not attracted the attention of our policy makers. With the electronics industry expected to grow from US$ 45 billion in 2009 to over US$ 350 billion by 2020, the initiatives from the government are definitely not significant enough to boost a sector that has the potential to be a good contributor to the country’s GDP.

Box________

Highlights of Budget 2011-2012

  • Reduction in excise duty for LEDs to 5 per cent and total exemption of CVD
  • Extension of exemption from SACD for parts imported for manufacturing of mobile phones and accessories till March 2012
  • Exemption of excise duty on solar cells
  • Reduction of excise to 5 per cent on solar lanterns
  • National mission for electric vehicles and duty reduction for electric vehicles
  • Electric Vehicles/ hybrid excise duty reduction
  • Base rate on excise duty raised from 4 per cent to 5 per cent
  • Service tax retained at 10 per cent
  • Central excise duty rate unchanged at 10 per cent
  • Special economic zones to come under MAT
  • Surcharge on domestic companies cut to 5 per cent from 7.5 per cent
  • IT exemption limit raised to 0.18 million from Rs 0.16 million
  • Legal representation for businesses under service tax

GST by June 2012

Finance Minister Pranab Mukherjee announced that the government would go ahead with the rollout of the Goods and Services Tax (GST) by committing to introduce a bill to amend the Constitution in the current session of Parliament. However, given the current situation with 10 states yet to come on board, the rollout would still take 15-16 months, with June 2012 as a likely date.

Contrary to the expectations of the industry, the minister did not raise the excise duty to 12 per cent; it stays at 10 per cent. There was widespread expectation that the finance minister will completely withdraw the stimulus measures that were pressed into service after the 2008 global economic slowdown.

With the Centre proposing to move to 8 per cent central GST in a phased manner, the present 10 per cent rate will help make the transition smoother.

About 130 items have been brought under the tax net, which enjoy exemption from excise duty but are taxed under VAT. These 130 items, which are mostly consumer goods, will attract a 1 per cent excise duty. The other 240 items that enjoy central excise duty exemption will be brought under the tax net when GST is introduced. The states and the Centre will have a common list of around 100 exempted items when GST is implemented.

GST, the country’s most ambitious tax reform, is expected to raise revenues and make the tax system efficient. It has, however, missed many deadlines due to stiff opposition from some states.

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