Union Budget 2016: Good or Bad for the Electronics Sector?

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Here are some of the key proposals introduced in the union budget 2016 that relate to India’s Electronics System Design Sector (ESDM).

  • The differential duty structure for mobiles and tablets which was introduced last year is being taken to the next level in the budget 2016 by including components and parts for chargers, batteries, wired head sets and speakers to nil duty on actual user condition.

“Government has imposed duty on products like chargers, battery used with mobile phones and waived duty on components used to make them. This makes strong case for making them in India. Those who will import them will need to pay 12.5 excise duty and domestic makers will have to pay 2 per cent.” – Pankaj Mohindroo, Indian Cellular Association’s national president .

“However, the exemption from basic customs duty, CV duty, special additional duty ( SAD) on charger/adapter, battery and wired headsets/speakers for mobile phone being withdrawn will increase the cost of the mobile phones till the time the companies manufacture these product domestically.” – Rajesh Agarwal, co-founder Micromax.

“Imports of assembled sub-systems like charger/adapter, battery and wired headsets/speakers for manufacture of mobile phone will cost 16.5 per cent more due to withdrawal of Basic Customs Duty and Special Additional Duty. On the other hand, inputs, parts and components, subparts for manufacturing these and other electronics sub-systems have been reduced to 0 per cent. Further, imports of populated Printed Circuit Boards will cost 2-4 per cent more. Both these reflect a strong commitment to promote local value additions in electronics.” – Vinay Shenoy, chairman, IESA

  • Considering the finer details of tax proposals in the budget 2016, it is clear that a number of duties have been rationalised to promote manufacturing of a wide range of products such as routers, modems, set top boxes, DVR, NVR, CCTV cameras and others. Basic Customs Duty on some of the components which are not covered under ITA-1 has been re-introduced.

Nitin Kunkolienker, senior vice president, MAIT opined that the change in duty structure as proposed in budget 2016 will encourage manufacturing of consumer premise equipment like modems, routers, digital video recorder, STB for internet, IP camera. “I expect investment of about ₹ 100000 million for their local production. I expect their prices will go down by 8 per cent in the first year and by 10 per cent in one and a half year” he added.

  •  The budget has proposed introduction of SAD on populated PCBs for a variety of equipment which will surely increase EMS activity in the country and drive up the demand for components.

“This will make mobile handset expensive by 1 per cent. We will request government to reconsider it.” said Mohindroo.

On the other hand Kunkolienker said the duty on PCBs for personal computers will have a minimal impact and it may encourage some players to buy these inputs locally.

  • One challenge that would confront local manufacturers of components is that all components, parts and inputs had been brought to nil BCD, CVD and SAD and this could create obstacles for them, as stated in ELCINA’s report.
  • One of the long-standing demands of component manufacturers had been simplification of procedure for import of inputs at zero duty under Customs Notification 25/99 which has been highly cumbersome and has continued to baffle and confuse the industry. It is noteworthy that a Notification superseding the erstwhile Rules of 1996 has been introduced and hopefully this will simplify the procedure considerably and encourage the component manufacturers.
  • The government is driving the Digital India initiative by exempting all earlier and applicable duty charges on DVR and CCTV. It will make products cheaper and affordable in the market keeping in mind the consumer’s perspective. This brings a bright opportunity for existing industry players and encourages new entrants to make their presence in this segment and cater to the audience more efficiently.
  • The customs duty has been extended for Microwave Ovens on magnetron of capacity of 1 KW to 1.5 KW. This will help domestic manufacturers to manufacture microwave ovens with enhanced capabilities and features.
  • Although the govt. has imposed actual user conditions on LED/LCD panels to manufacture the TVs from 1st April, 2016, this can create a disability for the industry as companies will have to go through a cumbersome process of filling IGCR licences for the end user agreement which takes at least 2-3 weeks in clearance, according to CEAMA.
  • Waiver on basic custom duty and special additional duty (SAD) for machinery and equipment that will be used for making electronic chips or semiconductor in India.
  • 10 per cent tax on income from worldwide exploitation of patents developed and registered in India.
  • Solar Power India initiative is one of the leading campaigns by the government to make eco-friendly products for the betterment of the environment. Reduction in excise duty on solar lamps from 12.5 per cent to Nil is a welcome step and it will boost the market for the solar products.
  • As per union budget 2016 , the cess on coal, lignite and peat has yet again doubled from ₹ 200 per tonne to ₹ 400 per tonne. In the previous financial year, it was doubled to ₹ 200 per tonne from ₹ 100 per tonne. This would mean an increase in funds available for ‘Renewable Energy’ of which ‘Solar’ forms a large part.

Dr Boaz Augustin, CMD, Borg Energy explained, “This means that all those eligible for subsidy in Solar PV can be a little more confident about receiving it after the project is done. If we look beyond the funds, the increase in the cess will also shoot current power tariffs, and would incentivise consumers to consider going solar.”

  •  From a taxation standpoint, lowering of Corporate IT Tax for companies not exceeding ₹ 5 million turnover to 25 per cent plus surcharge is a positive move as it offers incentives to SMEs and SMBs in the country to focus on their growth.
  • The corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding ₹ 50 million (in the financial year ending March 2015) is proposed to be lowered to 29 per cent plus surcharge and cess.
  • Another proposal that will benefit the country and stimulate start-ups on the growth trajectory is the amendment to the taxation for new manufacturing companies incorporated after 1 March 2016, as they will now have the option to be taxed at 25 per cent plus surcharge and cess provided they do not claim profit linked to investment.
  • Great news for start-ups: 100 per cent deduction on profits for startups for 3 out of first 5 years; only MAT to apply. Plus, shortening of the holding period from three to two years to get benefits of long-term Capital Gain regime in case of unlisted companies.
  • Registration of a company will take no longer than just a day under the Government’s 1 Day Incorporation Policy.

Industry leaders’ perspectives

Here’s what some of the industry leaders from India’s tech sector (ESDM and IT) said after reviewing the budget 2016.

Vikram Desai, president, ELCINA has expressed happiness that given the challenges the Finance Minister has to contend with to meet high expectations of various sectors of the industry, SME’s, big corporate houses, the middle class and social sectors, the Budget has come up to our expectations. Desai appreciated that the Finance Minister has drawn a roadmap for relief to all sectors as the GDP growth gets accelerated leading to higher revenues available with the government.

“The government’s focus on bringing Adhaar framework through Social Security Platform would require immense technology support and we have the capabilities as well. The entire transformation of citizenship identity to a uniform platform has brought lots of cheer in the IT ecosystem.”- Vinay Shenoy, chairman, IESA

“The government impetus on Make in India by providing tax and duty benefits will boost the manufacturing sector for a longer period of time for strengthening the manufacturing capabilities of India. The Industry today is well versed to address the environmental concerns; however, the government should consider formulating a coherent policy wherein development and environment conservation goes hand-in-hand. Govt. should also emphasize on incentivizing manufacturing of energy efficient and eco-friendly products.” – Manish Sharma, president ,CEAMA and managing director, Panasonic India & South Asia

“The Union Budget 2016 has largely met the expectations of the Electronics Systems Design and Manufacturing (ESDM) sector with a number of changes in the Indirect tax structure to strengthen manufacturing of IT Hardware and mobile phones. The Budget lays right emphasis on domestic manufacturing to facilitate the Prime Minister’s pet project “Make in India”. It will provide the much needed fillip to accelerate growth and generation of jobs which is acutely lacking today.” – Rajoo Goel, secretary general, ELCINA

“Exemption of BCD and SAD for ATMP for semiconductor wafer fabrication / LCD fabrication is a very well-planned move and will certainly give a boost to local manufacturing especially to SMEs. Similar exemption extended to parts and components, sub parts for manufacturing of charger, adaptors, mobile phones, routers, modems, set- top boxes etc., will significantly go a long way in encouraging local production. Imposition of BCD on finished products like telecom equipment etc., is a very well thought out to enhance domestic manufacturing and reducing import dependence. Reduction of BCD on specific capital goods for manufacturing of various fuses is a boost to component manufacturing and enriching the supply chain.” – M N Vidyashankar, president, IESA

“The effort to incentivise the ‘Make In India’ program by way of domestic value adding in the Electronics Manufacturing Systems segment is a step in the positive direction as is the removing of custom duties. This augurs well for us as majority of the spending in our industry is on imported ESDM items.” – Sunil Khanna, president and managing director of Emerson Network Power India.

“The proposal on reduction in excise duty on inputs, parts and components, subparts for manufacture of charger/adapter, battery and wired headsets/speakers of mobile phone, being exempted from 12.5 per cent to nil is a welcome move and will eventually promote the manufacturing of these components domestically.” – Rajesh Agarwal, co-founder, Micromax Informatics Limited

“All of us who are the in Solar Industry may have felt that there was stark contrast in last year’s speech and the one made today in terms of the importance given to the ‘Solar Industry’. This year, ‘Solar’ was not given individual attention and came under the bigger umbrella of ‘Alternative Sources of Energy’. However, the targets set last year of achieving 1,00,000 MW of solar by 2022 remain as they are. From April 2017, Accelerated Depreciation will be limited to a maximum of 40 per cent which currently stands at 80 per cent. Claiming Accelerated Depreciation for tax saving purposes was a huge incentive for industrial and commercial consumers to go solar. Although, solar already makes commercial sense, April 2016- 2017 will see massive capacity additions , in order to use this incentive while it’s available. If prices don’t fall at rate which ‘compensates’ for the use of A.D in one year, then uptake of solar is expected to slow in the financial year 2017-18.”- Dr Boaz Augustin, CMD, Borg Energy

“For the IT industry, the Budget has outlined proposals and schemes that add thrust to the Government’s vision of digitization in India. The Budget has been one of the most technology-oriented Budgets we’ve ever seen. From technology platforms and data analytics to automation, the Finance Minister has bet largely on technology to encourage the digitization of G2C platforms, digital literacy, employment generation, and Smart Cities. The Internet and education are great equalisers and the government’s push for skills development of 1 million youth in the next 3 years is a powerful initiative to transform India into a digitally empowered society and knowledge economy.” – Dinesh Malkani, president, Cisco India and SAARC

“Initiatives like Smart Cities, Make in India and Digital India have already opened up hordes of opportunities for Persistent and other companies, and this Budget carries forward the government’s vision of using technology to help the country continue on its growth trajectory. Initiatives like the launch of a new Digital Literacy Mission Scheme to cover around 6 million additional households within the next 3 years to spread digital literacy in rural India will truly help to bring the Digital India mission at grassroots level.” – Mritunjay Singh, COO and executive director, Persistent Systems.

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