Govt announces M-SIPS guidelines: Electronics industry now needs to act

With incentives of Rs 100 billion have the potential to create employment for nearly 0.5 million people

After the Cabinet approved the Modified Special Incentive Package Scheme (M-SIPS) in July 2012, the Department of Electronics and Information Technology (DeitY) has come up with detailed guidelines on this scheme. As this scheme has been introduced to attract investments in India’s electronics manufacturing sector, the government has lowered the investment threshold. The previous policy mandated a minimum investment of Rs 10,000 million because of which companies refrained from investing in the sector during the global economic crisis in 2008-09. By lowering the investment threshold, the government feels that a similar situation can be avoided in case of another economic crisis. This incentive package is a part of the National Policy on Electronics, which was approved by the Cabinet in October 2012.

Objectives of M-SIPS

An existing scheme was modified and renamed as M-SIPS because the government found that, currently, electronics manufacturers face many hindrances like the high cost of power and finance, high transactional costs, a poor supply chain base, etc.

The scheme, therefore, aims to boost domestic and global investments in the electronics manufacturing sector; cut down transaction costs; remove other obstacles that the manufacturing sector faces; boost the manufacture of semiconductors, components and electronic products; and reduce dependency on imports while procuring semiconductor wafers, components, equipment, etc.

 With incentives of Rs 100 billion, M-SIPS has the potential to create employment for nearly 0.5 million people.

Where M-SIPS is applicable

Benefits under M-SIPS can be obtained if investments are made in new units in the electronics systems design and manufacturing sector (ESDM) or for the expansion of capacity, modernisation and diversification of existing units.

To qualify for funds under the ‘expansion of capacity, modernisation and diversification of an existing unit’ category, there must be an increase in the value of fixed capital investments in plant and machinery by not less than 25 per cent.

New units have to be set up within the electronics manufacturing clusters that are to be notified by DeitY.

New or existing units should be engaged in the design and manufacture of electronics and nanoelectronics products and their accessories.

Even electronics manufacturing services (EMS) companies, which provide services related to the manufacture of sub-assemblies and parts, including integration services to OEMs, are eligible for incentives under M-SIPS.

The scheme also provides incentives for the relocation of units to India from abroad.

The available incentives

Capital expenditure: M-SIPS provides a subsidy for investments in capital expenditure—20 per cent for investments in SEZs and 25 per cent in non-SEZs.

Capital expenditure for the purpose of this scheme will be calculated as a total of the expenditure on land (subject to a maximum of 2 per cent of total capital expenditure), buildings, plant and machinery, as well as technology, including research and development.

Incentives based on capital expenditure shall be released after the end of the financial year in which total investments exceed the threshold value. Thereafter, incentives will be provided annually, based on the value of investments made during the year.

Reimbursement of central taxes and duties: M-SIPS also provides for the reimbursement of counter veiling duty (CVD)/excise for capital equipment for non-SEZ units. For units requiring advanced technology and high capital investments, like fabs, there is a provision for the reimbursement of central taxes and duties.

Investment thresholds vary depending upon the type and nature of products being manufactured, as defined in the scheme. These investment thresholds vary from Rs 10 million to Rs 54 billion for setting up of fabs, and for assembly, testing, marking and packaging (ATMP) as well as manufacturing activities.

Reimbursement of central taxes and duties actually paid will be released after the end of the financial year in which the unit commences production. Thereafter, incentives will be provided annually, based on the value of taxes or duties actually paid during the year.

 Approvals for incentives not exceeding Rs 100 billion will be granted during the XII Plan period.

The scheme gives companies an option to declare financial closure of projects in stages and avail subsidies accordingly. This will help companies to set up units.

Categories where incentives can be obtained

The incentives are available for 29 categories of ESDM products including telecom, IT hardware, consumer electronics, medical electronics, automotive electronics, solar photovoltaics, LEDs, LCDs, strategic electronics, avionics, industrial electronics, nanoelectronics, semiconductor chips and chip components, other electronic components and electronic manufacturing services (EMS)

Units across the value chain, which include raw materials, and the assembly, testing, packaging and accessories for the above categories of products, are eligible for incentives.

Time limit

Incentives are available for investments made in a project within a period of 10 years from the date of approval.

The scheme is open for three years from notification. Since the notification was published on July 27, 2012, the initial applications to avail the incentives offered in this scheme will be received up to July 26, 2015.

Applications should be filed with the M-SIPS appraisal committee.

Committees to be set up for implementation

An M-SIPS appraisal committee will be set up by DeitY to consider the applications under the scheme and submit its recommendations to the government. On the basis of these recommendations, approval will be granted to the applications by the Central government.

One or more technical evaluation committees (TECs) will also be set up, which will provide recommendations regarding the technology proposed by an applicant and whether the said technology is ‘state-of-the-art’ or not. A TEC will comprise 6-8 members, including 3-4 academicians, 2-3 industry representatives and 1-2 representatives from DeitY.

A programme management unit (PMU) will also be set up to assist in processing and appraising the initial and follow up applications received under the scheme.

How to apply

An initial application, complete in all respects, can be made by an applicant for the approval of a particular project under the scheme. A project proposed in an initial application will be for investments in the manufacture of products. If the initial application is made by a consortium, each member of the consortium should sign the application. Investments by entities other than applicants will not be considered for the purpose of assessing the eligible incentives under the scheme.

If a project is proposed to be implemented in phases, the complete project would be considered for approval, and only that phase of the project for which financial closure is furnished will be considered for implementation and incentives. The incentives under the scheme, at any point of time, will be limited to the phase of the project which is approved for implementation.

The applicant has to make a non-refundable initial application fee, which has to be paid in the form of a crossed demand draft made in favour of DeitY. In addition to the application fee, the applicant will also have to pay an appraisal fee if DeitY chooses to get the project appraised through a third party.

What the industry can do with M-SIPS

The government has taken some corrective measures and has come up with this ambitious scheme. Now, it is for the electronics industry to act fast and derive maximum benefits from it.

The taxation benefits offered by the government under this scheme can act as an eye opener to the global companies, motivating them to set up more R&D and manufacturing units in India.

One concern shared by the industry is that the scheme seems to be more for ‘reimbursements’, ‘subsidies’ and ‘discounts’, and does not appear as a vehicle for investments. The industry is also sceptical that this policy is unlikely to work for semiconductor fabrication, as even countries that are leaders in this field give almost full benefits for starting such fabs. Also, incentives for ‘relocation’ of units from abroad could be difficult to classify.

Despite all these worries, this scheme reflects a sincere effort from the government, and all stakeholders of the electronics ecosystem should carefully consider all that it offers. It is expected that by the next decade, electronics companies will substantially increase their engineering, production and assembly footprint in India in order to be locally relevant, and to compete and grow.

After the Cabinet approved the Modified Special Incentive Package Scheme (M-SIPS) in July 2012, the Department of Electronics and Information Technology (DeitY) has come up with detailed guidelines on this scheme. As this scheme has been introduced to attract investments in India’s electronics manufacturing sector, the government has lowered the investment threshold. The previous policy mandated a minimum investment of Rs 10,000 million because of which companies refrained from investing in the sector during the global economic crisis in 2008-09. By lowering the investment threshold, the government feels that a similar situation can be avoided in case of another economic crisis. This incentive package is a part of the National Policy on Electronics, which was approved by the Cabinet in October 2012.

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Subsidy for investments in capital expenditure

By Srabani Sen