From tax reforms to a more attractive DLI scheme and India’s sovereignty in electronics, the domestic electronics and semiconductor industry keenly awaits the Union Budget 2025 on Saturday.
The Union Budget 2025 is set to be tabled at the Lok Sabha on Saturday, the 1st of February, 2025. As several sectors gear up with their anticipations, the Indian electronics industry already has a comprehensive wishlist focusing on boosting innovation, competitiveness, and exports.
According to a report by the Economic Times, key proposals include significant enhancements to research and development (R&D) incentives, extended support for domestic manufacturers, and measures to promote exports, as the sector is particularly keen on transforming India into a global electronics manufacturing hub.
Tax relaxation for R&D
India’s relatively low R&D spending has been a concern for long. As per ET, despite growth in this area, India’s gross expenditure on R&D is only around 0.6-0.7% of GDP, significantly below global leaders such as China (2.4%), the USA (3.5%), and Israel (5.4%).
Specifically, the India Electronics and Semiconductor Association (IESA) recommended an allocation of ₹100 billion separately for R&D initiatives in the Electronics System Design and Manufacturing (ESDM) sector under a public-private partnership (PPP) model.
The electronics industry is also calling for an additional 5% income tax reduction for companies that spend more than 3% of their turnover on R&D and file patents or designs in India.
Moreover, industry leaders are advocating for the introduction of a “patent box” tax regime, similar to those in the UK, China, Belgium, and France, to reduce tax rates on income from patents and intellectual property (IP).
They are calling for a 10-year tax holiday on sales of products with IP developed through in-house R&D, along with clear guidelines and transparency mechanisms to certify IP ownership and track R&D investments.
Aid to micro, small and medium enterprises (MSMEs)
The Electronics Industries Association of India (ELCINA) has called for increased support for MSMEs, highlighting the financial burden of testing and certification to meet international standards. They have proposed establishing subsidised testing and certification facilities tailored to MSMEs and recommended the development of surplus testing capacity accredited to both global and BIS standards for electronic components.
Furthermore, the industry is seeking an extension of the 15% concessional corporate income tax for manufacturing companies until March 31, 2029, to attract investment, particularly in component manufacturing. ELCINA reportedly advocated for an investment fund for SMEs and creating product-specific clusters to develop domestic leaders in semiconductors and telecom equipment.
The DLI Scheme
Much anticipations are revolving around the future of the Design-Linked Incentive (DLI) Scheme too. Introduced in 2022 to support semiconductor and electronics design, this scheme has been vital in encouraging semiconductor design by offering up to 50% reimbursement of eligible expenses. However, industry stakeholders are pushing for a 10-year extension of the DLI Scheme until January 1, 2035. Given the lengthy timelines of electronics design projects, they argue that this support is essential.
Additionally, they advocate for the carry-forward of unspent funds and propose an additional $20 billion allocation to meet the rising demand for R&D in emerging technologies like AI, IoT, 5G, and autonomous systems.
“The Design-Linked Incentive (DLI) must be made more attractive by integrating larger imperatives for startups and companies developing designs tailored to indigenous needs and customers,” noted Pankaj Panjwani, CEO and Founder of KeenSemi, a Noida-based firm that specialises in silicon chip design.
‘Made-in-India’
On the export front, there are strong calls for a 4-5% export incentive for electronics manufacturing under the RoDTEP (Remission of Duties and Taxes on Exported Products) scheme. This incentive would help Indian manufacturers remain competitive globally, mainly as countries like the US and the European Union diversify their supply chains per the China+1 strategy.
To further support exports, ELCINA reportedly called for an increase in the Basic Customs Duty (BCD) on optical fibre cables to 20% to curb dumping from countries like China.
In addition to export incentives, the industry is urging the extension of the Interest Equalisation Scheme (IES) for pre- and post-shipment credit until 2026. They also recommend raising the IES rate to 5% in light of rising credit costs and reduced export incentives, which have placed significant financial strain on manufacturers.
“Imagine export of semiconductor manufacturing machines being restricted tomorrow!”
Industry veterans like Dr Ajai Chowdhry, founder of HCL, have reflected on new restrictions by the US government, which might affect India’s semiconductor ambitions. As geopolitical tensions intensify, they have urged the government to address emerging challenges in India’s semiconductor and AI sectors in the upcoming Budget.
“This is the new Unipolar world where every country is on its own. And with the US and China vying for global dominance, India’s rise will resisted by both,” noted Chowdhry.
Ashok Chandak, President of the IESA, highlighted the impact of US export controls on AI chips, recommending a strategic push to develop domestic alternatives. “We need to focus on domestic chip production to mitigate the effects of restricted access to advanced AI chips,” Chandak said.
Echoing this, Chowdhry called for India to accelerate its push towards self-reliance, particularly in semiconductors, urging the government to fund initiatives like the RISCV technology developed at IIT Madras. “We must design our own chips to avoid future sanctions and safeguard our technological sovereignty,” he stated.
Chowdhry also recommended significant funding for semiconductor manufacturing and AI infrastructure, including a proposed ₹440 billion for the ‘Product Nation’ initiative, with ₹150 billion going toward system products and ₹110 billion for semiconductor products.
Tax benefits for semiconductor fabrication
The semiconductor sector is also urging the government to implement measures like tax exemptions or reduced rates for new fabrication plants. An expert recommended offering accelerated depreciation on chip production equipment and special tax incentives for semiconductor manufacturers exporting chips or related technologies, such as tax exemptions on export earnings or reduced export duties.
“Televisions should not be considered luxury items”
The consumer electronics industry called on the Finance Minister to reduce the GST on televisions from 28% to 18%, arguing that the current high tax rate creates an imbalance, particularly when raw materials are taxed at 18%.
“Aligning tax rates would simplify the structure and reduce costs for manufacturers and consumers. Additionally, streamlining approval processes for businesses is essential. Despite initiatives like the one-window clearance system, approval procedures remain cumbersome. Simplifying these processes would promote economic growth and benefit citizens,” noted Pallavi Singh, Country Representative for JVC TV India.
Furthermore, Arjun Bajaj, Director of Videotex, advocated implementing the Production-Linked Incentive (PLI) Scheme for TV manufacturing and creating a local ecosystem for critical components, such as displays and semiconductors.
In the Union Budget 2024-25, the government has allocated approximately ₹155 billion to the electronics sector, prioritising semiconductors and mobile manufacturing. Of this, ₹69.03 billion is dedicated to semiconductor projects, with ₹42.03 billion for semiconductor production and ₹15 billion for chip plants.
As per Business Standard, additionally, a proposed ₹250 billion PLI scheme is on the way to strengthen domestic manufacturing, reducing reliance on imported electronic components and potentially lowering costs for products like smartphones, laptops, and consumer electronics over time.
As the electronics industry goes on to seek significant fiscal support to foster long-term growth, innovation, and global competitiveness, will the Union Budget 2025 redefine the horizons of ‘Made-in-India’ electronics? The industry waits eagerly for Saturday.
