India to become telecom manufacturing hub

NEW DELHI, INDIA: India needs to clear certain tax anomalies and a platform created on the lines of the Special Economic Zones (SEZs) exclusively for Telecom sector to become a telecom manufacturing hub.

Going by the telecom subscriber additions every month for the past two years, India is set to become a telecom manufacturing hub, but for the stumbling blocks mentioned above.

Till date, only 135 SEZs has been notified though 362 SEZs have received formal approvals and another 176 in-principle approvals.

Talking to CyberMedia News on the recent development of the Telecom Equipment Manufacturers Association (TEMA) Export Promotion Forum, K V Madhan, associate director (Indirect Tax) with Ernst & Young, said that SEZ will be heralding the future of industrial development in India.

“SEZ will be the engines of economic growth in India, which will result in exponential employment generation. It will be an enabler of high-end technologies, thus positioning India as a manufacturing hub. Removing tax anomalies will act as a springboard for ensuring India’s success in the comity of nations,” he opined.

The India advantage

The country has the potential to become a manufacturing hub for telecom products, given the fact that the global electronics industry is poised to grow exponentially from $950 billion in 2005 to $2100 billion by 2010.

At the same time, India’s electronics industry is growing approximately at 11 per cent CAGR (compounded annual growth rate) over the past five years, with a share of $11 billion, which is very nascent by global standards.

“A few decades ago, India was primarily treated as (the) import hub. Then industries started importing raw materials, components, etc. into India and the assembly of inputs into finished goods started happening in India, leading to India becoming an assembling hub. Hence to ensure real manufacturing in India, to increase the share of Indian industry in global market, to make India as the preferred Manufacturing place and to make India as the Electronics Hub, we need a clear cut strategy/ roadmap for development of this industry,” Madhan said.

Encourage manufacturing in SEZ

Madhan said that most of the electronic/ telecom products fall under the ITA Agreement and hence attract NIL customs duties. “As far as ITA products are concerned, both direct imports and imports by SEZ units attract NIL customs duties i.e. no revenue accrues to government from this transaction,” he said.

“However manufacturing in SEZ acts as a key driver for economic growth, creation of employment opportunities with other spin-off benefits to the economy and the people. Hence to encourage real manufacturing in India and to attract billions of dollars of investments into the Electronic Hardware Manufacturing sector and to generate several thousands of employment, the strategy of SEZ should be fine-tuned by encouraging more Electronic SEZs throughout the country,” he argued.

Elaborating on the issue, he said that while importing by DTA unit, Government gets customs duties @ 34.472 per cent, as revenue.

“Moreover, while importing products from SEZ by a DTA unit, Government gets revenue in the form of customs duty – 34.472 per cent, VAT 4- 12.5 per cent and profit from the transaction also attracts Income Tax @ 33.99 per cent; under provisions the Income Tax exemption for 10 years is available only for physical export from the SEZ,” he said.

Thus manufacturing, Madhan pointed out that in SEZ has the twin benefits of additional revenue generation to the Government and also multiplier effects on economy like employment generation, economic benefits, etc.

At the same time, Madhan said that value addition should not suffer duties/taxes. “ITA products attract NIL Customs duties in respect of direct imports as well as imports by SEZ units i.e. no revenue accrues to Govt. from this transaction. In case of direct imports, customs duties are payable only on the import transactional value. However, in case of goods manufactured in SEZ and sold into DTA, full customs duties are payable at the sale value (including value addition made at SEZ),” he said.

“Thus taxing value addition happened in the SEZ discourages SEZ manufacturing. The guiding principle of “Only goods/services should be exported and not taxes” should be adhered to strictly,” he said further.

Encourage cluster-based growth model

Section 10AA of the Income-Tax Act provides for tax deduction only on profits derived from “exports out of India by land, sea, air or by any other mode, whether physical or otherwise.”

In this context, Madhan said that though the Central SEZ Act, 2005 recognizes both inter-SEZ and intra-SEZ sales by SEZ units as part of “exports” definition, Income Tax Act does not recognize them leading to denial of tax holiday on inter-SEZ and intra-SEZ sales.

“The definition of Exports under Income Tax Act should be aligned with SEZ Act to allow genuine SEZ units acting as vendors to other SEZ units located in the same, or different SEZs to enjoy Income Tax benefits. SEZ law recognizes deemed exports for computing Net Foreign Exchange: the same analogy should be extended for claiming income tax deduction also. Once implemented, this will lead to vendor-based cluster growth model resulting in development of entire eco-system of component suppliers, research and development, assembly, testing and product delivery happening in India,” he asserted.

Issues of concern

Madhan said that the major issues of concern to make India as a telecom-manufacturing hub have to be cleared at the earliest time possible.

In the case of transfer of assets to SEZ, the current Income Tax provisions (as applicable to SEZ units) allow transfer of plant and machinery up to 20 per cent of the total value. Whereas the current SEZ Rules prohibit any transfer of plant and machinery from DTA into SEZ.

“This anomaly in legal provisions penalizes the early bird manufacturers who have come to India and made investments under non-SEZ regimes, i.e prior to SEZ Act being enacted. This anomaly between SEZ rules and Income Tax Act needs to be corrected considering the limited availability of space in SEZs now. To safeguard the interest of Govt., industrial units set up at least within three years may be allowed to transfer up to 20 per cent to SEZ units,” he suggested.

Madhan said that the Semiconductor Policy should be implemented immediately by announcing the operational guidelines in respect of eligibility, computation of incentives, exit, etc.

“Similarly, the inverted duty structure needs to be studied and rectified especially in the background of surging imports due to Free Trade Agreements. Goods manufactured in SEZ using the combination of Non-ITA products and ITA products should be treated at par with ITA products and should not suffer taxes/duties,” he said further.

Repeating success

“India has become a knowledge hub for services especially a powerhouse for IT and ITeS services due to tax benefits and ample support by the government. The success model for IT sector can be replicated in Electronic Hardware manufacturing with adequate support of Government. Nurturing electronic hardware manufacturing in SEZ will benefit India by way of wealth creation, employment generation and economic growth,” Madhan added.