It seems to be a vicious circle—while manufacturers feel that zero import duty on finished products is the biggest deterrent for the growth of the manufacturing industry in India, importers feel that unless India develops a strong manufacturing base for quality products that match the high quality of imported goods, local assemblers and traders would prefer shopping overseas
By Srabani Sen
Tuesday, May 21, 2013: With the IT minister Kapil Sibal seeking changes in the duty structure for the import of electronic components, a Pandora’s box of issues affecting Indian electronics manufacturers has been opened, yet again.
The electronics hardware industry suffers due to an unfavourable duty structure that makes Indian manufacturing uncompetitive, not only in the domestic market, but in global markets. Industry pundits also feel that this issue which has been raised again, will die a natural death like it does every year, with nothing constructive getting done to address the long-standing problem.
While a senior government official in the Department and Electronics and Information Technology (DeitY) says that every year DeitY raises this issue as a Budget recommendation, Vinod Sharma, managing director, Deki Electronics Ltd, says that since the government has an international commitment to the WTO and other free trade agreements (FTAs), it will not roll back these duty structures, in view of the negative global impact such a move may cause.
The products that enjoy zero duty are listed under the ITA-1 of the WTO. Apart from this, many finished products are imported at zero customs duty from specific countries with whom the Government of India has signed the FTA. “The implications of changing this multilateral/bilateral customs duty structure may not be favourable for the overall economic structure. The government may, therefore, think of putting in place a safeguard duty on a majority of these finished goods as India’s manufacturing base has been eroded in the domestic tariff areas (DTA),” says B S Sethia, director, Elin Electronics Ltd.
Sethia explains that most of the MNCs manufacture or rather assemble products in the special economic zones (SEZs). “Even if they assemble the finished products with the so called screw driver technology, the production qualifies as “manufactured product” despite hardly any value-addition has been done,” he says. These assembled products are allowed to be exported to the DTA without any export obligation and at zero duty customs. A glaring example of this is evident in the area of manufacture of mobile phones in India. Out of the total demand of the moble phones in the country (200 million) nearly 150 million are reported to be manufactured (which have just been assembled) in India in the SEZs. If the SEZ production is considered ‘made in India’ then a safeguard duty is immediately needed.
Impact of inverted duty structure
Under the inverted duty structure, the import duty on finished products is lower than on the parts or components used in manufacturing these electronics products. Under this duty structure, domestically produced goods cost more than their imported substitutes. According to ASSOCHAM, most components for computers like motherboards, cabinets, memory modules and graphics cards attract a CVD (countervailing duty) of 10.3 per cent and a SAD (special additional duty) of 4 per cent, leading to an effective duty of 14.73 per cent as against 10.3 per cent for the finished goods. For example, the present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India, making it higher than a direct import. Again, it is cheaper to import set-top boxes than manufacture them locally, despite raising the duty from 5 per cent to 10 per cent.
Worldwide, countries give more and better opportunities to domestic manufacturers and discourage imports. In India, however, the taxation system is so weird that it is cheaper to import finished goods and equipment than manufacture them locally. “This is the biggest deterrent for the growth of the manufacturing industry in India. I firmly believe that local manufacturing with zero customs duty is not possible in any sector in India, and should, as a rule, be avoided for all product lines. Not just zero customs duty, even zero excise duty is a deterrent for manufacturing. All the members down the supply chain are rendered non-competitive the moment any terminal duty (customs or excise) is brought to zero. This is very fundamental logic, and I’m dismayed that we have taken so long to realise this,” says Sharma.
A higher duty directly leads to a higher cost for manufacturing. As a result, manufacturers do not produce in volumes and utilise just a fraction of their manufacturing capacities. Low production volumes, in turn, lead to even higher manufacturing costs per unit. This has discouraged many multinationals who prefer to set up their facilities in China or in other Asian countries, rather than in India. For the same reason, in 2009, Sony shifted its production from India to Thailand.
The industry feels that the domestic manufacturers should be provided a level playing field vis-à-vis their overseas counterparts. The preferential market access policy has given them a little respite, but all components, barring bare PCBs and SMPS (switch mode power supply), can be imported.
“It is cheaper to import the components with zero duty and sell the product rather than manufacture it here. So we need something to be done at the Finance Ministry regarding the duty structure, to make it less attractive for people to import, and hence develop the manufacturing industry here,” Sibal has reportedly said. “I am sure the Finance Ministry will give encouragement to the Indian industry… In the ultimate analysis, it is a question of job creation… Unless we create jobs in India, how are the young going to be empowered,” he added.
According to Deepa Doraiswamy, industry manager, electronics and security, Frost & Sullivan, the customs duty on products such as smartphones, mobile phones, tablets, smart meters, LED lights, etc, should be hiked so as to encourage local production. “Zero import duties should be imposed on all the raw materials and capital goods used for the manufacture of electronic products and equipment. Currently, a lot of the raw materials such as plastics, non-ferrous metals, etc, to name a few, attract 5-10 per cent duty, making local manufacturing more expensive and less attractive—especially when the import duties on finished products are at 0 per cent. Therefore, as an enabler for local manufacturing and value addition, it is pertinent that the import duties on all raw materials be made zero,” she said.
Explains Sethia, “Keeping in view our country’s priority of employment generation, as pointed out by IT minister Kapil Sibal it is high time that we review ITA-1 itself. It was expected to attract investments into the country when we had signed this agreement. But even after 15 years, a majority of the manufacturing countries, except China, have not benefited from this. China has benefited because it is still not a market economy and it is not WTO-compliant. China differentiates between local and foreign goods, and provides export subsidies.”
Another deterrent to employment generation in the DTA is the zero excise duty. “Zero excise duty on finished goods helps only imports. DTA producers have to pay excise duty on the input materials, which increases the cost of the product. Hence, they cannot compete with the imported goods rendering local manufacturing unviable. The Ministry of Finance should respect Kapil Sibal’s advice and work on removing the zero duty of both excise and customs. Till customs duty is corrected, the ministry must put in place the safeguard duty to save our industries and ensure employment generation,” adds Sethia.
Impact on vendors
If the duty structure is changed such that it forces people to import less and source more from domestic manufacturers, how will the vendors, who import goods and sell them in India, react?
“If duties are raised, traders will definitely be at a loss. Let them become manufacturers. It will benefit our economy in a wholesome manner,” says Sethia.
Counters Samrat Gujjar, COO, Trontek, an importer of batteries, “The import and excise duties vary from product to product. For batteries, we already pay a 10 per cent import duty, 12 per cent CVD and 4 per cent special CVD.”
After the Budget 2013-14, when the import duty on the set top boxes was raised from 5 per cent to 10 per cent, the importers had responded by calling it ‘unhelpful’. Responding to this increase in the import duty, Harit Nagpal, president of the DTH Operators Association of India and managing director-CEO, Tata Sky Ltd, had reportedly said, “The DTH industry is already paying 32 per cent of its revenue as taxes…..
There is no local manufacturer of repute who can deliver quality boxes in large quantities. Therefore, this increase seems out of place and in all fairness it should be reversed.”
In fact, the vendors want SAD to be abolished, which they feel is a hindrance to their business.
“People will continue to import electronics goods and equipment unless there is a strong manufacturing base for quality products in India—quality in both material and workmanship. Indian manufacturers should, therefore, lay emphasis on world-class quality products so as to attract the existing importers to source from them,” concludes Vinod Bajaj, senior manager, corporate, Sumitron Exports Pvt Ltd.
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