"We need to simplify our tax structure"

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Ashish Mehta | January 11, 2014


Dr Ajay Kumar
Dr Ajay Kumar

Dr Ajay Kumar is a 1985 batch Indian administrative service (IAS) officer of Kerala cadre. An alumnus of IIT Kanpur, Kumar was heading the IT department in Kerala as principal secretary before taking over as joint secretary of the department of electronics and information technology (DeitY). When he joined DeitY, the department didn’t have electronics division. He was instrumental in the formulation of the National Policy on Electronics (NPE) 2012 and is now spearheading its implementation. In a conversation with Shivangi Narayan and Pratap Vikram Singh, Kumar talks about the challenges in the development of electronic industry and the steps being taken for its promotion. Excerpts:

What are the key disabilities in the electronics sector?

The major disability is infrastructure: the lack of adequate power supply and logistics facility, including transport. Second is the finance cost. Finance rates are much higher compared to competing nations. Third is the transaction cost for getting approvals like labour, environment and ground water which turns out to be very high in terms of the time taken, complexity and multiplicity of processes and due to the level of corruption involved. In fact, 26 approvals are required for setting up a manufacturing plant in India.

The other major concern or disability is the fact that we are a zero-duty sector and hence anyone from across the globe can supply to this sector. Compare this with other sector like the automobile industry, and while the import duty in the sector has come down from 300 percent to 30 percent, it still provides a lot of cushion to the local manufacturers.

The zero duty structure has created a situation where it is easier for global players—the OEMs—to push products like TV, computers, tablets or even play stations manufactured in their facilities elsewhere into the Indian market. This makes it harder for a start up to enter the market. These bigger companies have the financial muscle to squeeze the smaller players.
 
Why do we have an inverted duty structure?

The Indian IT sector is subject to IT Agreement (ITA)-1 signed in 1996-97, wherein we agreed that a large set of products—covering 80 percent of products in the electronics sector—will have zero duty. And that has been adopted by the WTO. It is forever binding. Efforts are on to expand the coverage of ITA to also include few other things like consumer electronics and medical electronics. But that is yet to be done. Somehow we went and agreed to make several of these products zero duty under free trade agreements (FTAs) and hence will have to abide by it.

Let me give you an example of how zero duty structure impacted our India manufacturing industry. Sometime back there was a trend of people acting as careers. They used to travel to other countries as tourists and on their return to India used to bring back white goods or electronic products like TV or laptop.

The price difference was such that it was cheaper for a person to go to Thailand and come back with a TV. Even casual traveler used to bring a TV set. So we issued an order prohibiting this practice. It was easy for people also because they could bring TV from Thailand without paying duty. One to two million TVs were brought to India annually. That was stopped.

In fact the domestic production increased by 40 percent between September 2012 and September 2013 and by 30 percent between October 2012 and October 2013. It still comes under FTA and zero duty but we have now prohibited individual travelers from bringing it as part of their routine baggage. This has given a boost to the local manufacturing. Today, there is a clear proof that if we could link our demand with domestic production we will have a thriving domestic manufacturing industry in the country.
 
But aren’t there different forms of inverted duty?

Under the rule, if something made in China or somewhere else is imported it is done at zero duty. But if I make that in SEZ and sell it in DTA, as per the SEZ rules, I will have to pay domestic duty. If I take input from other states I will have to pay duty. But If I import same component I don’t have to pay duty. So there is a two percent inversion. Then there are the dual use components and raw materials like plastic and aluminum which are on the zero duty list but attract customs duty.

[In case of imports] there is a special additional duty (SAD) in lieu of CST that one pays locally. Suppose if I import a PC I pay four percent SAD. When I sell PC I get it adjusted on the VAT that I have to pay for the sale of computer. So in effect I didn’t pay SAD which was the intention.

On other hand if I am a local manufacturer and import a component or part of the computer or a hard disk drive I have to pay SAD at the same rate of four percent. However, since I make the value addition and assemble them to manufacture the product in India, I will also need to pay the excise duty and cannot even get the SAD adjusted. So SAD is an additional duty which I have to pay as a local manufacturer. This is another form of inverted duty.

Then there is another duty anomaly specific to set-top boxes (STB). If you sell STBs you have to pay VAT to the state governments. That is why most service providers do not sell STBs. Instead, they provide STBs on a monthly rental basis that attracts only the service tax and comes out to be much cheaper.
 
Why do the prices of IT and electronic products differ in India and countries like the US?

Pricing is a strategic decision. Then there are other duties that one needs to pay. Besides, we have a different duty structure in India. VAT is quite high and though the basic custom duty is zero, one has to pay the CVD. For example one has to pay an overall 36 percent duty on television. Apart from the higher duty structure, what also matters is the respective companies pricing structure which is decided based on volumes, logistics and overhead costs and other various factors. While you may find some of the electronic items cheaper in the US a lot of products are much cheaper in India.

Why aren’t we doing anything about the tax regime that is not industry-friendly?

We take this up with the revenue department all the time. I think we need to simplify our tax structure. Sony closed down some years ago. You go to plants of HP and Dell and they are all lying idle. These multinational companies have decided to not use these lines, which are lying idle there, because it doesn’t work for them. In fact, they have given up. Because the duty structure is so complex that the inversion is not apparent.

One needs to understand that the fast -changing technology creates its own problems. Inputs are changing and so the duty structure changes. And while the prices of devices are going down, there is no mechanism which can react to this fast changing system. We have suggested that there should be a joint working group mechanism that will enable the various sector specific departments and ministries to apprise the revenue department about the fast changing things so that corrective steps can be taken. There is an urgent need for this an inter-ministerial group to deal with technical issues.

Another important thing is the implementation of GST, which could be the most important things to happen to the manufacturing industry in this country. It will simplify things—whatever you do will be in a line. CST will go away.

What about the national electronic mission? It hasn’t been established yet.

It’s a work in progress. We have an appraisal committee for MSIPS. We have a steering committee for the cluster scheme. A lot of mechanism has been created. It is not stopping our work. But it’s good to have an overarching body which could expedite the decision making.
 
How many clusters have been identified?

We have notified 18 clusters so far and in the near future six or eight more are going to be notified. The brown fields are the existing clusters. Here we just identified areas of potential growth. In Bangalore, a proposal has come to further enhance the capacity of cluster to grow. This is in advance stages of approval. But that’s the only request we have got for expansion in the brownfield.

We have notified six greenfields again based on the proposal we have received so far. Now these people will have to set up clusters. A few other proposals are in the pipeline.

Out of the six, GMR will be setting up a cluster in Hosur in Tamil Nadu while ELCINA will be setting up the Bhiwadi cluster. There are two such projects in Andhra Pradesh being done by the state government. Similarly the projects in Bhopal and Jabalpur will be managed by the Madhya Pradesh government.
 
What are we doing in development of human resource for the sector?

Before talking about the human resource, let me explain you our strengths. Today electronics is becoming a composite of hardware and software and very often the software part is quite significant when you buy a cellphone or other device. We are already having a strong software industry. We are already participating in several big hardware manufacturers’ embedded software and design from India. Except that we are doing it for them and not here in India. We have the ability to do that.

There is trend you see that the software companies like Google, Microsoft and Facebook are coming with their devices. The second big thing is the chip design. Anecdotally it is said that all chips that are manufactured go through an Indian hand. At least half of it goes through an Indian office. So we have a very strong base in that.

Coming back to the issue of availability of adequate human resource for the sector, it is important to understand that 75 percent of the chip design work is done by those having PhD-level skills and India at the moment has a gap in the sector. If China is manufacturing more than 40 percent of electronics there are not many countries which can provide an alternative to that scale. India has that scale but we need to fill in the resource gap. Hence HR development is at the core of our strategy.

The national policy on electronics clearly articulates that the country needs to produce 2,500 PhDs every year. To take this forward, we have a scheme which has been approved by the Expenditure Finance Committee and is now going to the cabinet. In the next four years, we will be able to produce 1,500 PhDs annually. The scheme provides for incentives to students who take up PhDs in electronics, both full time and part time. It provides for infrastructure development in the institutes who have to gear up to take PhDs. It also provides for research and grant to the faculty.

 

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