Tax rates for IT hardware may be reset

Tax rates for IT hardware may be reset

In an attempt to make India, which is one of the world’s preferred destinations for software and back-office work, a regional—if not global—hub for hardware manufacturing, the Union government is readying a policy that could see total tax on hardware coming down from the current 16-34% to 5-7%.

“The hardware industry in India is still at the assembling stage and we do not have a brand. We are working on a scheme that will bring companies relief in taxes, such as excise duty and value-added tax (VAT), and also create the right infrastructure, similar to the special economic zones, that will have clusters of hardware manufacturing," said a senior official in the ministry of communications and information technology (IT), who preferred not to be identified because the policy is still being given final touches.

At an industry event here in October, Dell Inc. chairman and chief executive Michael Dell said he saw an opportunity for Indian IT hardware manufacturing to become part of the global supply chain if it moved to a more competitive tariff regime (in relation with comparable economies).

Talk of the new hardware policy comes less than a year after India unveiled a package of capital and tax incentives designed to attract billions of dollars of investment into semiconductor fabrication in the country. The new hardware policy aims to bring down the total incidence of tax to levels comparable to locations in Asean (Association of Southeast Asian Nations) countries, harmonize tax stru-cture, encourage research and development work and the filing, and provide financial support to electronics start-ups.

The policy, which is likely to be ready within the next two months, will take effect from the next fiscal year.

The official said the idea behind a hardware manufacturing policy was to help Indian firms be involved “right from the design of a product to patenting it to production and finally marketing it. Most of the design work done in India is (currently) going abroad".

To this end, the government plans to reduce tax incidence to the levels prevalent in most Asean countries (5-7%), M. Madhavan Nambiar, additional secretary in the communications and IT ministry, had said at a recent gathering of semiconductor industry executives. For most IT and electronics products, the total incidence of tax in India varies between 16% and 34%. For instance, computers attract an excise duty of 12%, VAT of 4% and an octroi (a levy on movement of goods) of 5% in states such as Maharashtra.

The size of the electronics industry in India is estimated at between $28 billion and $30 billion (Rs1.11 trillion and Rs1.19 trillion) in terms of revenues, of which local manufacturing accounted for about $16 billion last fiscal year. According to the Electronics and Computer Software Export Promotion Council, an autonomous body sponsored by the Union government, the sector is expected to grow to between $200 billion and $250 billion in revenues by 2015.

An electronics committee of industry lobby group Confederation of Indian Industry (CII) has also asked for a correction of an inverted duty structure—where finished products carry a lower tax levy (import duty) than that on components or assemblies, or where such levies are lower than domestic taxes on components and sub-assemblies—as part of a wish list submitted ahead of the Union budget for fiscal 2009. The aim, the panel said, was to meet at least 40% of demand for electronics in India through domestic production by 2012 and export around $50 billion worth of hardware.

CII has also asked for a reduction in taxes and excise duties throughout the manufacturing value chain—from components to the final product. Currently, companies making computers and other IT products pay a 12% excise duty on all finished equipment and sub-assemblies, 12% on components or parts of components and specific inputs (end-user based) as well as on all capital goods, and 16% on basic materials and dual-use materials.

“All these should be gradually reduced to 8% each. And, duty on all inputs for manufacture of electronics or IT hardware products, permitted for import at zero duty, be reduced to zero," CII said in a presentation to the government recently.

The government is also considering providing R&D support to industry-academia collaborations involving the Indian Institutes of Technology (IITs), and encouraging the incubation of ideas in the hardware sector.

Such changes, industry experts said, would help manufacturers in India become globally competitive. Given that the global information and communication technologies (ICT) hardware accounts for the single largest manufacturing sector in the world at $1.7 trillion (in 2006), “India is nowhere in the world horizon", said Deepak Puri, chairman and managing director of Moser Baer India Ltd.

The hardware industry has long lobbied for rules that will encourage domestic firms to manufacture components and finished products in India.