Creating a Bargain Position for India in Hardware Recommendations for Budget 2002-03

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Creating a Bargain Position for Indiain
HardwareRecommendations for Budget 2002-03
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Why Focus on IT Manufacturing Hardware

• IT Manufacturing governs and determines the
  competitive of a nation
• IT/Electronics exports account for 47 of Spore
  GDP and 65 of Malaysia
• Chinas hardware exports USD 26 Bn in 2000
• Will help build bargain position
• Shield India from the vulnerability of Sanctions
  from countries controlling technology and
  production
• Huge potential for employment generation for
  unskilled labour
• Hardware focus essential to remain competitive in
  software
• Estimated cumulative hardware requirement by 2008
  in the India to meet software exports target of
  USD 87 Bn USD 160 Bn
• will be a significant drain on forex reserves if
  everything is imported
• The future is in embedded systems and
  applications - hardware knowledge is critical to
  build this competence

3
The Challenges for hardware Industry in India

• Indian IT Industry faced with zero duty regime as
  per our commitment under ITA WTO
• Non IT Inputs may continue to attract duty while
  end product would be at nil rate Inverted Tariff
  Structure
• Fast changing Technology environment -
  Convergence will throw out of gear the existing
  products
• Falling share in terms of global scale less than
  1 of Global
• Fast depleting manufacturing base
• Lack of Government support to hardware
  manufacturing
• Velocity of doing business very slow high
  turnaround time No exports
• Poor/ marginal investments in manufacturing -
  just about Rs. 1,300 crs.since liberalisation
• Frequent policy changes have eroded investor
  confidence Industry cannot do long term planning

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The Challenges of Globalisation...

• India Need to build strategy around technology
• Domestic market increased Grey market and
  piracy
• High price sensitivity of the market coupled with
  high local taxation has stymied IT penetration
• PC penetration in India 6.2/1000 World
  average 26/1000

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What we aim to achieve A Bargain position in
Hardware

• Vibrant manufacturing base for Hardware
• Creation of Indian IPR through focus on hardware
  and firmware designs and creation of High end
  technology
• Increased IT penetration in the country through
  affordable IT and Killer hardware
  applications

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Strategy for Creating a Bargain position in
Hardware
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What we need from the Ministry of Finance

• ITA - WTO implementation 2005, not 2003
• Concomitant to the phase out the Government had
  committed
• Nil customs duty on Capital Goods for Electronics
  manufacturing
• Phase out customs duty on all input/raw materials
  including items of dual usage Customs duty on
  inputs varies from 0 to 35
• Reduction in transaction/turn-around time to
  international levels for exports and imports
• The above is yet to be implemented
• Follow Indias commitment to WTO on duty Phase
  out
• Year 2002-03 2003-04 2004-05 2005-06
• Peak Rate 15 15 10 0

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What we need from the Ministry of Finance

• Recommended Duty Structure for 2002- 03

S.No. Item HSN Existing Recommended
1. Finished Goods 84.71 15 15
2. Parts of 8471(except Populated PCBs) 8473.30 5 Nil
3. Populated PCBs 8473.30 15 15
4. Stepper Motors for Printers 8501.10 5 Nil
5. Ink Cartridges, Ribbon Assembly, Ribbon Gear Assembly, Ribbon Gear Carriage for use in Printers for Computers Ch. 84,96 25 15
6. Routers and Modems 85.17.50 15 15
7. Set-top boxes 8517.80 25 15
8. Parts of Printers for computers 8483 25 Nil
9. Cable Assemblies for Computers and Peripherals 8544.19/ 41/49 35 Nil
10. Key switches for Key-boards 8536.50 15 Nil
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What we need from the Ministry of Finance

• Recommendation for rewording/amendment of Customs
  Notification No. 17/2001 dated 01/03/2001
• S.No. 269 Condition No. 7 for stepper motors
  should be deleted
• S.No. 233 8473.30

Existing Recommended
Parts (including ink cartridges with Print head assembly and ink spray nozzle) of the machines of heading 84.71, other than Populated Printed Circuit Boards (PPCBs) including motherboards (with or without CPU) Parts of machines of heading 84.71 with or without Printed Circuit board (including ink cartridges with Print head assembly and ink spray nozzle of inkjet Printers, Toner cartridges of Laser Printers and print head of Dot-matrix/Line printers), other than Populated Printed Circuit Boards (PPCBs) including motherboards (with or without CPU)
Condition No. 7 If the importer follows the
procedure set out in the Customs (Import of goods
at concessional rate of Duty for Manufacture of
Excisable Goods) Rules, 1996.
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What we need from the Ministry of Finance

• Rationalisation of Customs Duty Correction of
  inverted tariff structure
• Customs duty on all Capital goods for Electronics
  manufacturing including tools, dyes, moulds etc.
  should be brought down to nil from existing 25
• Customs duty on input raw materials including
  dual usage items eg. Steel, Plastics, Chemicals
  etc. should be reduced to nil as finished goods
  in most cases are already at nil rate
• A list-based exemption or a special scheme for
  hardware manufacturing may be considered
• Uniform Excise duty on all IT products (HSN 8471
  8473.30) at 8
• Essential for combating Grey Market 35 of PC
  market is grey through excise and sales tax
  evasion (Total unorganised market is 53 of PC
  market)
• Essential to bring down the price of IT products
• Loss of revenue in initial two years will be more
  than offset by volumes generated in the third year

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What we need from the Ministry of Finance

• Remove 4 Special Additional Duty (SAD)
• Increase the rate of depreciation on IT
  products/PC (HSN 8471) to 100 from existing 60
• This will enable Small and Medium Enterprises to
  invest in IT and stay competitive
• Businesses can donate used IT products to
  schools/colleges as book value after one year
  will be nil

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What we need from the Ministry of Finance

• Simplification of procedures for exports and
  imports
• Clearance time for imports (from landing to
  physical clearance) and exports (from bonded
  premises to vessel) should be reduced from
  existing average 7 days to 6 hours
• Self declaration based clearance for all
  IT/electronics products for exports and imports
• Customs to work 2 shiftsX365 in at least 4 metros
  (airports and seaports) and Bangalore, Hyderabad
  and Goa
• Cooling off period of 24 hours to be discontinued
  for exports6.

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What we need from the Ministry of Finance

• Proposed model for Imports clearance

System clears most shipments for release on
preliminary entry
Preliminary bill of entry prepared as per
pre-alerts
File advance preliminary entry
Pre-deposit of duty of agreed value
Pre-arrival process Carried out in advance, does
not impact clearance TAT
No movement to Customs shed (except for random
inspection of some shipments)
Received by importer
Arrival
Direct removal from aircraft !
Arrival process No wait points for goods - ZERO
turnaround time for goods clearance!
At end of specified period, file periodic bill of
entry with full details, exact duties calculated
etc
Update IGM no and other details as available
Actual duty paid as per the periodic bill of entry
Audit and closure
Post clearance process As these are post
clearance time for these does not impact TAT
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What we need from the Ministry of Finance

• Simplification of procedures for Excise Duty
• Set the rules for transaction value concept for
  assessment, as currently there is tremendous
  interpretation issues with different authorities.
• Monthly payment of Excise duty in place of
  fortnightly payment.
• No Bond (of exports value) in case the exporter
  has received advance payment for exports or has
  confirmed LC.
• The bond is not lifted even after the export
  obligations are met and the export realization is
  completed.
• The Bond is lifted only after the closure of
  advance licenses. 
• There should be time limit to close all
  assessments and appeals say 2 years
• There should be settlement commission for excise
• Follow the Income tax model

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What we need from the Ministry of Finance

• Create Manufacturing Zones Island of
  Infrastructure Excellence
• Option I DTA Scheme ICT Habitats
• Permit duty free import of
• Raw materials including dual usage items
• All Capital goods
• No restrictions on Sales into DTA or for Exports
• Nil Corporate tax for 10 years to encourage IT
  manufacturing
• Existing units should be allowed to freely
  convert to new scheme
• or
• Option II Modification of EHTP to encourage
  manufacturing and exports
• No NFEP and Export performance (EP) conditions
• No physical bonding all clearances on basis of
  self declaration
• Unlimited DTA access on payment of full
  applicable duties

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What we need from the Ministry of Finance

• Encouraging indigenous RD
• Corporate Income Tax exemption on royalties from
  licensing of Technology and Intellectual Property
• Amend bilateral treaties for removal of
  withholding tax on Technology exports/imports
  Germany - 10 USA-15 Japan - 20
• popularise products developed in India by
  exempting them from all local levies
• Nil Sales tax (local and Central) on all
  IT/electronics products for at least two years
• Encouraging IT Maintenance industry
• No Service Tax on AMC (Annual Maintenance Contact)

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What we need from the Ministry of Finance

• Banking and Finance Related
• The banking appraisal process should take into
  account the latest audited results of the
  company, whether half year, or quarterly or
  yearly along with results of the previous two
  financial year
• Currently results of only the last financial year
  are taken into consideration.
• Margin money paid on LC or BGs should be given
  the same rate of interest as that of cash credits
  operated with the same bank. Alternatively, the
  banks can mark a lien to the extent of margins on
  the customers cash credit accounts.
• In cases where importers have to take a
  constructed bill of entry from customs LC opened
  by the authorized dealer should be accepted as
  proof of payment already made against the
  original Bill of Entry.

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What we need from the Ministry of Finance

• Improving IT penetration
• Increased Government spend on IT consumption
• Government purchase/price preference for IT
  products made/assembled in India irrespective of
  the origin of the company
• Ensure Central and State Governments actually
  spend 3 of their Budget on IT
• Sales of IT products to educational institutions
  should be exempted of all local levies
• Permit PF loan/withdrawal for purchase of PC (at
  least one per individual)

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What we need from the Ministry of Finance

• Create a conducive Investment Climate for IT
  manufacturing
• Permit 100 foreign equity for investment in IT
  manufacturing
• currently limited to designated schemes
• Aggressive Industry-Government collaboration to
  market India and attract Investment - set annual
  targets
• Permit 100 exports remittance to be banked in
  foreign currency

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Net Impact 2005

• PC volumes will reach 10 million from current 1.8
  million
• PC penetration will be 26 per 1000 from current 6
  per thousand
• at par with the existing world average of 26
  /1000
• Excise Duty and sales tax collection in 2005 will
  more than offset the cumulative revenue loss due
  to nil rate in 20002-03 and 2003-04
• The industry will reach a critical mass entire
  value chain will flourish
• Volumes will lead to ancilliariasation
• Consumption of basic raw material produced in
  India will increase
• Increased employment opportunities for
  semi-skilled 5 million new jobs
• Confidence of the manufacturing industry will
  soar - more exports focus Target USD Bn 5 in
  hardware and designs

Only bold steps will lead to dramatic results!
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A High-Tech perspective of a new direction to an
old system .
Lets MAke IT happen..
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Impact of 8 Excise and Nil Sales Tax
(Annexure-I ) 2,240 650

• Under Current duty structure Excise Duty 16
  Sales Tax 4

2001-02 2002-03 2003-04 2004-05 PC Volumes
(Mn) 2.45 3.18 4.14 5.38 Growth
Rate 30 30 30 30 PC Penetration per
1000 8 11 15 20 PC Price Reduction - 5 10 10 Ex
cise Duty (Rs.Crs.) 513 633 741 866 Sales Tax
(Rs. Crs.) 149 184 215 215
2002- 05 Cumulative 2,240 650

• Recommended a) 8 Excise Duty b) Nil Sales Tax
  for Next 2 years i.e. 2002-04

2001-02 2002-03 2003-04 2004-05 PC Volumes
(Mn) 2.45 3.92 6.27 9.72 Growth
Rate 30 60 60 55 PC Penetration per
1000 8 11.5 17 26 PC Price Reduction - 15 10 6
Excise Duty (Rs.Crs.) 513 611 879 1,227 Sales Tax
(Rs. Crs.) 149 Nil Nil 662
2002- 05 Cumulative 2,717 (21) 662
(2)