National Policy for Electronic Component Manufacturing
By Spotlight - 30-03-2019
th <30% VA and 15-20% protection with >30% VA.
Income Tax Holiday
Income Tax Holiday
Income Tax Holiday;
Disallow CGST Credit to importer of these components
Refund of CGST paid on local inputs to manufacturer of these components
Income Tax Holiday;
Disallow CGST Credit to importer of these components
3. Denial of Input Tax Credit in GST Regime: The credit on CGST content charged on the import of finished equipment should not be allowed. This will encourage local manufacturing of electronic equipment by making the imported items costlier. Further, the CGST paid on domestically manufactured inputs (Raw Material, Components, Intermediate goods) used in manufacturing by these finished equipment manufacturers should be refunded. This will incentivize purchase of domestically manufactured inputs/components. A list of selected items has been annexed keeping in mind the production possibilities in the country. Refer Annexure 1(Electronic Equipment), 2 (Components) and 3 (ICTE & Security Products) for list of products.
4. Capex subsidy under MSIPS: It is a well-documented fact that disabilities increase with value addition. ELCINA proposes three slabs of Capex subsidy under MSIPS scheme. The value addition is the lowest at product level, higher at component manufacturing level and highest at Semiconductor and ATMP level. The MSIPS Capex subsidy grading is recommended as follows:
MSIPS Subsidy (%)
5. MEIS Benefits proposed to ensure adequate support:
MEIS Incentives (%)
6. Production Subsidy/OPEX benefits: This provision has been introduced under the MSIPS Scheme vide notification of 3rd August 2015 including high value added items such as semiconductor wafering, logic microprocessors, IC’s and added new components such as PCB, discrete semiconductors fab, Power Semiconductors Fab and ATMP etc. This provides for a 10% Production Subsidy on the value addition by the manufacturing unit. Thus higher the value addition, higher the subsidy and vice versa. Production Subsidy should be extended to include all components & raw materials which are covered under ITA-1 and are subject to Zero Customs Duty.
OPEX benefits based on value addition will go a long way in enabling manufacturing of electronic components.
7. Benefit through Direct Tax: Finance Cost, Energy Cost and Logistics/Transportation are the three main measurable contributors to disability costs. It is recommended that weighted deduction in respect of Interest paid, Power cost and Freight in proportion to the disabilities is provided for as a deduction in Profit Before Tax (PBT). These are auditable costs and are included in Statutory Financial Statements of companies. Thus allowing deduction of twice the cost incurred while computing taxable income would set off 2/3rd of the disability cost assuming 33% Corporate Income Tax.
8. Deemed export status for the manufacture of ITA-1 items:
a. Special Imprest License/ Duty considerations and Advance Intermediate License
b. Deemed Exports Drawback Scheme i.e, on the Deemed Exports, Drawback at the rate fixed by the Ministry of Finance for the goods which are physically exported.
c. Refund of terminal CGST (earlier it was excise duty) ie., CGST if any paid, on the goods supplied under Deemed Exports is refunded
d. In respect of supply of capital goods to EPCG license holder, the supplier shall be entitled to the benefits stated above except, however, that the benefit of Special Imprest License or Deemed Export Drawback Scheme shall be available only in case of supplies made to Zero duty EPCG license holder.
e. Export incentives/benefits under Foreign Trade Policy Schemes (MEIS)
a. Measures to Increase Demand of Locally Manufactured Components
9. Electronic Components must be excluded from all future FTA’s and try to identify remove them from existing FTA’s
10. PCB Assemblies for non-ITA-1 equipment should be subjected to 10% customs duty. The Input Tax credit should be disallowed on CGST paid on import of these PCB assemblies.
11. India is a signatory of ITA-I due to which 217 tariff lines along with all items/parts/sub-parts used in their manufacture are allowed at zero customs duty. To prevent the decline and enable viability of ESDM manufacturing in India a BCD of 15% should be imposed on all non ITA -1 items.
12. Strict implementation of PMA/PPO Scheme and inclusion of more equipment under the Scheme is essential to drive domestic demand. The list of items may be expanded after due deliberations with industry stakeholders. Judicious inclusion of manufacturing processes and assemblies/components for qualifying for PMA/PPO benefits will result in driving local manufacturing and value addition.
13. In the scheme the condition of L1 is impossible to meet by domestic manufacturers surviving with various identified disabilities. Computation of L1 should be done considering disabilities for domestic manufacturers and provide them a 5-10% cushion. They must get favourable payment terms to reduce their finance costs.
14. Incentivising “Design in India”:
15. The Make in India campaign can only be successful when the thrust will be on “Design in India”. This will drive demand for indigenous components/PCBA’s and assemblies. Imported designs drive demand for imported components and assemblies, and makes dependent on imported components determined by the customer/owner of the design.
16. Set Top Boxes are a major manufacturing opportunity and need special attention and protection from unfair imports through FTA routes, specially ASEAN. Indian manufacturers are competing with highly adverse financing by Chinese suppliers and this itself gives a 10-15% cost benefit to Chinese imports. Support through policy and Quality Certifications/BIS will further help in promoting local STB industry.
A. Promoting Eco-System for High Value Added Manufacturing
17. Electronic Component Manufacturing Fund: A dedicated fund for the development of Component Manufacturing ecosystem should be floated. This fund may be on the lines of EDF and/or as a separate Venture fund with government’s equity and monitoring mechanism. This Venture Fund should be eligible for Income Tax breaks on its earnings and thus provide low cost capital to high value added electronics manufacturers.
18. Component oriented EMC’s: High Cost of Land has always been a hindrance for investments in Component manufacturing. ELCINA recommends a dedicated EMC policy for component manufacturing supported with EMS companies. This should be on a PPP model, where land will always remain with the government provided on favourable long lease terms in favour of manufacturers. This will allow manufacturers to invest in manufacturing rather than engaging in the acquisition of land at a premium price and run short of working capital.
19. 3-4 Specialized EMC’s should be planned to establish the eco-system for components. These EMC’s could individually focus on high volume and high growth component groups such as PCB’s, LED’s, Sensors, Wound Components, Switches and Relays. To encourage manufacturers, specialised testing and R&D/Prototyping facilities should be provided in these Clusters.
20. Government campaigns such as Digital India should be used to spur domestic manufacturing capacities: Demonetisation created a demand for PoS machines and Micro ATM’s. Bharat Net, Smart cities, IoT, Electric vehicles initiative etc. are big government programs which boost the demand for electronic hardware. Advance planning to launch these programs would help in boosting domestic electronics manufacturing rather than depending on imports.
21. Credit Default Guarantee for Electronics Manufacturing
⦁ Electronic Manufacturing industry is facing challenges to set-up electronics manufacturing facilities in India because of high cost of investment involved and lack of adequate credit facilities.
⦁ Most of these machinery is required to be imported. Considering the significant amount of investment involved, procurement has to be done on credit basis; either by availing bank loans / bank guarantee.
⦁ The banks in India require at least 100% of the loan / guarantee amount as collateral for extending credit facilities. Such collateral requirement poses challenges for growth and hence, there is a need for the government to enable banks / financial institutions to extend credit default guarantee for facilitating import of capital goods.
⦁ Electronics equipment funded through a loan from banks / FI's for a tenor of 4 - 5 years for which the Investor shall pay an upfront amount of 20% of the total value. The Government of India shall extend Credit Default Guarantee for 50% of the total value covering the entire tenor of the loan.
⦁ This credit default guarantee shall be extended to the financial institutions / banks who provide the lease
⦁ Credit Default Guarantee for Domestic Sale of Electronic Products and Components. This will go a long way in boosting investments in Electronics Manufacturing.
⦁ Similarly as there is inadequate ecosystem in India for components, hence 70-80% of all components and even final electronic goods are imported. Currently, the importers of components enjoy 3 - 6 months credit from Chinese exporters. Such facility has been enabled by SINOSURE, the China government owned insurance company to promote exports.
⦁ This helps the importers as a working capital bridge to realize cash and effect payments for the imports over the 3 - 6 month credit period.
⦁ Hence, the Indian industry prefers to import components and equipment rather than buying from the domestic manufacturers.
⦁ Once the manufacturing facilities are set-up as stated above, the components can be procured locally and substantially reduce import dependence.
⦁ It is proposed that Central Government should extend Credit Default Guarantee covering 25% of the value of the sale of domestically manufactured components and electronic products for a tenor of 3 - 6 month period and support local manufacturers by incentivizing purchase of their components/products.
B. Recommendations for Printed Circuit Boards Manufacturing
PCBs are the backbone of Electronics Industry and are required in all electronic products. To boost electronic manufacturing in the country it is important to have adequate PCB manufacturing capacity that meets the need of the industry at competitive prices thereby preventing excessive dependence on imports. At present almost 80 to 85 % of country’s PCB requirements are met through imports.
The main reasons for the low share of indigenous production are as follows:
⦁ Large Capital investments required for setting up PCB manufacturing unit, inhibiting manufacturers to set up new units, especially for multilayered PCBs, which are expected to grow at a significant rate.
⦁ Inverted duty structure, as inputs for manufacture of PCB’s are subject to 5 to 10% Customs Duty while PCBs attract Nil duty under the ITA-1.
⦁ Lack of availability of skilled labor
⦁ Lack of availability of raw materials like, pure grade silicon, Copper laminates, required for fabrication of the printed circuit boards.
⦁ Lack of availability of raw materials at competitive prices.
⦁ Lack of access to new technology and state of the art capital equipment
The main reason for lack of large investments in PCB manufacturing is that PCB’s are subject to zero BCD under ITA-1 and most PCBA’s are also imported at zero duty. Cost of imports from China and other leading countries such as Taiwan and Korea are attractive and there is abundant availability of all types of PCB’s, specially the multilayer and high end ones.
Thus local equipment manufacturers prefer to import PCB’s as well as PCBA’s where costs are lower and lead times are short. Designing and prototyping of PCB’s is done quickly in China, Taiwan etc and this is another factor favouring imports.
Large Investments in PCB manufacturing will happen only if local manufacturing is incentivised. The following recommendations will go a long way in boosting local manufacturing of PCB’s :
I. Capex Subsidy under MSIPS or similar Scheme must be provided and threshold should be reduced to Rs 2 Crores so that MSME’s too can benefit and expand. The present threshold of Rs 5 Crores is high for Small Units. MSIPS should be extended to manufacturers of inputs for PCB’s as these are not manufactured locally.
II. Opex Subsidy either by way of 10% Production Subsidy on value addition or refund of IGST paid on inputs for a period of 5 years to the extent of Capital Investment.
III. As BCD cannot be imposed on PCB’s, an alternative is to disallow credit of CGST portion (9%) of GST imposed on imported PCB’s
IV. Impose 10% BCD on all imported PCBA’s for non-ITA-1 electronic equipment. This will encourage local PCB assembly/population and boost demand for local PCB’s.
V. MEIS benefit of 7% for locally manufactured PCB exports (the present 2% is too low)
VI. Phased Manufacturing Programs are being prepared for a number of high volume Electronic Equipment and this will drive demand for local components. PCB’s and PCB Assembly should be given special focus and eligibility benefits in these programs so that PCB’s are sourced locally and PCB assembly is done locally under these programs.
(Note: Recommendations made above in Section [B] are relevant for PCB also].
Eco-System Support through PCB Manufacturing Zones/Clusters
There is a need to set up at least one large PCB Cluster in India to establish the eco-system for this critical component:
I. Sustainable PCB manufacturing requires good quality water & power in abundant quantity. It is necessary for the government (whether state or central) to provide infrastructure at subsidized cost to the industry and the following key facilities should be provided:
II. Good quality and quantity of water. PCB requires plenty of water during manufacturing.