Budget 2013: A mixed bag for electronics industry

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By Srabani Sen

With the unveiling of the Union Budget 2013, a Pandora’s box has been opened. From the electronics industry’s perspective, the Union Budget 2013-14 has once again failed to live up to expectations. While the finance minister announced certain exemptions in customs duty, and raised excise duty, the Budget evoked mixed reactions among the industry. The industry feels that while the Budget offers some sops for the semiconductor industry and for the set top box manufacturers, it has disappointed many others, as it has failed to address the inverted tax structure and promote local manufacturing.

The industry associations, which had made strong recommendations keeping in mind the potential and the growth perspective of the electronics industry, are also disappointed. While ELCINA finds that none of the Budget recommendations made by the association to rationalise the import duty structure relevant to this sector have been addressed, MAIT feels that the government has failed to protect the interests of domestic electronics manufacturing. On the other hand, the India Electronics and Semiconductor Association (IESA) welcomes the Budget for its boost to the Indian semiconductor industry.

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The industry has sought an exemption of service tax for SEZs and the proposed electronic manufacturing clusters (EMCs), and has recommended that the Budget rationalise the indirect tax composition of 12 per cent GST (8 per cent excise plus 4 per cent of value added tax, [VAT]) on the electronics manufacturing value chain in India to achieve self-sufficiency in electronics. However, these recommendations have not been acted on.

However, the National Electronics Policy 2012 found a special mention in the finance minister’s Budget speech. “The National Electronics Policy 2012 is intended to promote the manufacture of electronic goods in India. We recognise the pivotal role of semiconductor wafer fabs in the ecosystem of the manufacture of electronics. I propose to provide appropriate incentives to semiconductor wafer manufacturing facilities including zero custom duty for plant and machinery,” Chidambaram said.

The Budget has also introduced some features to help the growth of MSMEs. By increasing the budgetary support for Small Industries Development Bank of India’s (SIDBI) Micro Finance Equity Fund by Rs 1000 million, the finance minister has ensured that the financing needs of MSMEs are taken into consideration and they are able to grow at an optimum pace.
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Adi Godrej, president, Confederation of Indian Industry (CII) and chairman, the Godrej Group

Adi Godrej, president, Confederation of Indian Industry (CII) and chairman, the Godrej Group

The Budget meets most of our concerns regarding fiscal consolidation, investment incentives and inclusive growth. Fiscal deficit has been kept below the target at 5.2 per cent for 2012-13, and has been pegged at 4.8 per cent for 2013-14. CII particularly welcomed the emphasis on inclusive growth and development, with Plan expenditure raised almost 30 per cent and inflationary pressures from the supply side sought to be depressed. This would encourage further monetary steps to lower interest rates which would spark investments.
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Rajoo Goel, secretary general, ELCINA

Rajoo Goel, secretary general, ELCINA

The Budget does not offer strong support for electronics manufacturing. The electronics industry, in general, has been largely disappointed. A special request to support the assembly of PCBs in the country has not found mention in the Budget. This step itself could have created a huge demand pull for electronics manufacturing in the country!

In a situation where most of the electronics and hardware industry is subject to zero duty under ITA–1 agreement, quite a number of inputs going into this industry attract import duties of 5-10 per cent. It appears that the finance minister has been constrained to ignore the requests for relief to this industry due to his anxiety to keep the fiscal deficit in check. The benefits announced under the National Electronics Policy need to be implemented with speed to resurrect electronics manufacturing in the country.
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POINTS TO CHEERProposal to introduce an investment allowance for new high value investments

  • The impact: This will attract new investments and quicken the implementation of projects. A company investing Rs1000 million or more in plant and machinery during the period April 1, 2013 to March 31, 2015 will be entitled to deduct an investment allowance of 15 per cent of the investment. This will be in addition to current rates of depreciation. There will be enormous spill-over benefit to small and medium enterprises.

Increased customs duty on set top boxes

  • The impact: There is a potential demand for 100 million STBs over the next 2-3 years as a result of the government’s move to digitise cable TV. This increase of import duty will help Indian manufacturers to address the unfair advantage imported STBs have been getting and will boost domestic manufacturing of STBs.

Rise in excise duty from 1 per cent to 6 per cent

  • The impact: Mobile phones above Rs 2000 will get expensive. This may encourage domestic manufacturing, but there is the risk of the grey market re-emerging in this product category.

Special mention of the Electronics Policy and zero duty import on all capital equipment for semiconductor fabs

  • The impact: The zero per cent customs duty for the import of equipment for a fab will help in improving the viability of the project for the investors.

Provides for setting up of a Rs 2 billion fund to help innovators and inventors

  • The impact: Both skills development and R&D are areas that are critical to India. This fund will help innovators and inventors scale up their inventions and develop products aimed at the masses.

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Arun Gupta, global CEO, NTL Lemnis

Arun Gupta, global CEO, NTL Lemnis

We welcome the government’s commitment to give an impetus to the manufacturing sector. The continued support to the segment with incentives for capital investments of more than Rs1000 million in plant and machinery, will propel growth in manufacturing. Also, zero custom duty on machinery for semiconductor fab will help the growth of the electronics industry.
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T Vasu, president, ELCINA

T Vasu, president, ELCINA

ELCINA is enthused by the special reference to the electronics manufacturing industry and the Electronics Policy 2012 in the finance minister’s Budget speech and the mention of the pivotal role that a semiconductor fab would play in development of this sector. While ELCINA expected more specific sops for the electronic components industry and the manufacturing value chain, we fully support the raising of customs duty on set top boxes which is a huge manufacturing opportunity. Which can spur the expansion of the sector. The imposition of additional excise duty of 5 per cent, now raised to 6 per cent should encourage mobile phone manufacturers to source components locally.
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Pranay Dhabhai, managing director, Akai India

Pranay Dhabhai, managing director, Akai India

This Budget is an extension of last year’s Budget, but since the expectations from the current Budget were very high, the mood and reactions around it are mixed. But altogether, it is a normal Budget with added impetus to the rural markets, which is good news for the consumer sector. What remains to be seen is the impact of all these measures.
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Jaijit Bhattacharya, co-chair, FICCI Electronics Hardware Committee

The IT and electronics manufacturing industry, which was looking forward to budgetary support, is disappointed that the government has not removed excise duties on seven key components.
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Rajan S Mathews, director general, Cellular Operators Association of India (COAI)

Rajan S Mathews, director general, Cellular Operators Association of India (COAI)

The Budget left the telecom sector deeply disappointed as none of the critical issues relating to the sector have been addressed. Detailed pre-Budget recommendations were made to the Ministry of Finance by COAI (Cellular Operators Association of India) and the need to provide telecom with the status of ‘infrastructure’, the lowering of multiples taxes and levies in the face of the poor financial health of the sector and the need to boost investor sentiments, were some of the most pressing and important submissions. Though, the finance minister emphasised the government’s objective of inclusive and sustained growth as well as financial inclusion, the sector which is vital for achieving the stated goals has again been deprived of the much required relief.

Granting of infrastructure status to the telecom service providers has been a long pending request of the industry which has again not been met. This would have provided the much needed boost to the telecom sector which is capital intensive and is presently starved for funds. The sector continues to be plagued with multiple levies and nothing has been done to rationalise them.

The continued ignoring of the industry’s legitimate needs, puts at grave risk the achievement of many of the objectives outlined in NTP-2012, such as broadband for all, rural penetration, roll out of 3G, 4G/LTE, etc. These require substantial investments and hence the industry would have benefited from its requests being addressed satisfactorily. The focus appears to be to continue to milk the industry of its remaining resources.
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J V Ramamurthy, president, MAIT

J V Ramamurthy, president, MAIT

The Budget has failed to protect the interests of the local electronics manufacturing. Though the
government has announced in the National Manufacturing Policy that it aims to increase the share of manufacturing in GDP to 25 per cent within a decade, the Budget has failed to reverse the inverted tax structure which has been impacting the industry for years now, making India a predominantly import-dependent country.
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Anwar Shirpurwala, executive director, MAIT

Anwar Shirpurwala, executive director, MAIT

The prevalent rates of countervailing duty (CVD) and special additional duty (SAD) on inputs for IT equipment result in an increase in the cost of a finished product manufactured in India. Thus, the industry will continue to be dependent on imports. In India, it is better to be a trader than a manufacturer. We welcome the move to give additional depreciation but the inverted duty structure and lack of demand would reduce the effect of the incentives too much for many companies to take advantage of this provision.
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T M Ramakrishnan, CEO, devices, S Mobility Ltd

T M Ramakrishnan, CEO, devices, S Mobility Ltd

The handsets industry is facing difficult times with increased competition and looming price wars. With the proposed increase in taxes on handsets above Rs 2000, we do not see a decrease in demand but definitely, there will be pressure on the margins. This decision will surely impact the industry’s focus on making smartphones more affordable. At the same time, it might get more difficult for smartphones to penetrate rural areas.
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P V G Menon, president, IESA

P V G Menon, president, IESA

The investment allowance of 15 per cent, in addition to the current depreciation benefits will significantly aid in attracting investments into this sector. We appreciate the zero per cent customs duty on the import of equipment for the semiconductor fab. This will help in improving the viability of the project for the investors. It is noteworthy that the Budget also provided for setting up of a Rs 2000 million fund to help innovators and inventors. Such a fund will help scale up their inventions and develop products aimed at the masses. We believe that the steps outlined by the finance minister for the electronics sector will help attract large investments, promote entrepreneurship and boost domestic manufacturing.
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Sanjay Jumar Kalirona, general manager, Mobiles, Intex Technologies

We will take some time to assess just how much of a financial impact the decision to increase taxes on mobiles will have on the industry. But at this moment when the mobile industry is booming, this is not a very positive decision. Eventually, it is the consumers who will suffer with the increased prices of handsets.
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Jaswinder S Ahuja, corporate vice president and MD, Cadence Design Systems

Jaswinder S Ahuja, corporate vice president and MD, Cadence Design Systems

We are pleased to note that the Budget provides incentives to the semiconductor industry in the form of import duty waivers on plant and machinery for companies looking to set up domestic fabrication units. The provisions of the National Policy on Electronics announced last year and this incentive are the first steps to kick-starting local manufacturing and accelerating the growth of the Indian electronics ecosystem.
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Amar Babu, managing director, Lenovo India and vice president, MAIT

Amar Babu, managing director, Lenovo India and vice president, MAIT

This year’s Budget is realistic and growth-oriented, but has failed to create any strong levers for the IT and electronics segment. The finance minister has attempted to address the core issues facing the economy—the growing current fiscal deficit, lowered investor confidence and the need for additional revenue generating reforms. However, with technology being a key business enabler, a welcome growth booster would be an inverted duty structure for manufacturers of IT products including PCs, which the Budget has not addressed.
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N Chandrasekaran, CEO & MD, Tata Consultancy Services

N Chandrasekaran, CEO & MD, Tata Consultancy Services
N Chandrasekaran, CEO & MD, Tata Consultancy Services

The finance minister’s intentions are very clear—to move India back to a higher growth plane. And given his lack of a runway, he has taken lots of small measures which together could boost growth. From a technology perspective, allowing funding for technology incubators located within academic institutions to qualify as CSR expenditure as per the new Companies Act will give a huge boost to entrepreneurs and start-ups and increase the engagement of the corporate sector in start-ups.

On the taxation front, removing double taxation on dividends received from overseas arms will reduce the burden on shareholders. From the perspective of the IT industry, the clarifications on taxation rules regarding development centres and safe harbour rules are very welcome as are measures to drive skills development, with a special focus on tier II and tier III towns.

Overall, it would be safe to say that with this Budget, we have started our climb back to higher GDP growth levels.
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Guruswamy Ganesh, VP and country manager, Freescale Semiconductor India Pvt Ltd

Guruswamy Ganesh, VP and country manager, Freescale Semiconductor India Pvt Ltd

This year’s Budget is extremely moderate with no major shifts in the earlier stance. In realistic terms, the Budget looks more like a formality, with not much initiatives on providing a big boost to the industry—something that was expected by the industry leaders.
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Anirudh Dhoot, president, CEAMA & director, Videocon

Anirudh Dhoot, president, CEAMA & director, Videocon
Anirudh Dhoot, president, CEAMA & director, Videocon

The Rs 650 billion allocation for education with a specific emphasis on science and technology, support to incubation projects, and a roadmap for skills-building among the youth—when combined are a powerful set of moves designed to nurture innovation without losing the holistic view.

As far as the electronics industry is concerned, it is encouraging that the Budget plans to promote set top box manufacturing by increasing the import duty from 5 per cent to 10 per cent and to boost local manufacturing of high tech electronic products in India. Further, if an MSME grows into a larger enterprise, benefits or preferences will continue up to three years after its growth and this will give incentives to MSME to grow to their potential. Overall, the Budget is positive for the consumer durables and electronics industry.
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Siddharth Mohanty, managing director, Lattice Semiconductor

We welcome the Budget proposal to introduce an investment allowance for new high value investments. It is a very positive development and will encourage local manufacturing in a big way. This will be the first step for us to develop the much required ecosystem within the country. It will not only give a boost to manufacturing but also to the design of equipment and systems. Those manufacturing products using electronics chips will also benefit from the move.
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Suresh C Senapaty, executive director and CFO, Wipro

Suresh C Senapaty, executive director and CFO, Wipro

The Budget delivers on the promise of fiscal prudence, continues to drive progress on reforms and chalks out initiatives like an investment allowance, to ensure growth is not ignored. Reforms have progressed in the areas of direct tax code, GST, and a tax administration reform commission to bring about a tax regime, which will be more proactive in bringing about the closure of issues rather than being litigious.
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Suman Reddy, vice president and managing director, Pegasystems

Though the finance minister acknowledged the challenges in bringing back the economic growth rate to 8 per cent, there were no specific policies and decisions announced which could allow us to grow at that rate. From the IT sector’s perspective, we had high expectations from this Budget to bring some clarity on the transfer pricing and hoped for a structured framework in terms of policies for the long term growth of the sector. We also had expectations on the infrastructural incentives for early stage start-ups. Most of these were unanswered in this Budget.
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Vinay Shenoy, managing director, Infineon Technologies India Pvt Ltd

Vinay Shenoy, managing director, Infineon Technologies India Pvt Ltd
Vinay Shenoy, managing director, Infineon Technologies India Pvt Ltd

The finance minister made a reference to incentives for semiconductor fabs—making it evident that this is important to him. He could have gone a step ahead and announced the planned Budget allocation for it during the current Five Year Plan, particularly because the government has been evaluating proposals for semiconductor fabs for some time now and the Budget would have been a good occasion to announce these projects.
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Sunil Khanna, president and MD, Emerson Network Power

Sunil Khanna, president and MD, Emerson Network Power
Sunil Khanna, president and MD, Emerson Network Power

The commitment to bring about constitutional reforms in GST is a positive sign. The finance minister’s initiative to set aside

Rs 9 billion towards GST compensation will encourage the states to get on board with GST and hasten reforms. Another welcome aspect is that there is no change in the normal rate of excise duty, coupled with the revival of investments in the manufacturing sector which has been reeling under inflationary pressures. The setting up of a Cabinet Committee on Investment (CCI) to monitor investment proposals and ongoing projects, remove bottlenecks, review stalled projects and improve public-private partnership, is welcome. The proposal to introduce a 15 per cent investment allowance for high value investments in plant and machinery will help the industry keep pace with rapidly changing technology.
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Pramoud Rao, managing director, Zicom Electronic Security Systems

Pramoud Rao, managing director, Zicom Electronic Security Systems
Pramoud Rao, managing director, Zicom Electronic Security Systems

It is not a flamboyant or even a populist Budget, as many would have expected, for the simple reason that early next year the country goes for the General Elections and finance minister’s chief concern seemed to be reducing fiscal deficit than curbing inflation. While thinking about country’s defence the finance minister could have also given a thought to the security of the society and created some sops for the electronics security industry, which is growing at a high rate, but is still no getting the attention it deserves and pays high taxes and duties on imports of electronic security equipment. One would have also expected tax holiday for our industry and some kind of impetus to start manufacturing units within the country.
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