India Telecom

December 3, 2003
Council calls for boosting mobile handset manufacturing

NEW DElHI -- The Telecom Equipment Manufacturers Association (TEMA), the Electronic Component Industries Association (ELCINA), the Consumer Electronics & TV Manufacturers Association (CETMA), and the Manufacturers Association for Information Technology (MAIT), have recently formed a Council of the Electronic Hardware Manufacturers Association in India.

Speaking at the official launch of the Council, N.K. Goyal, president, TEMA, said, "We are nurturing a Rs. 40,000-crore strong manufacturing base in the country." He complimented the Telecom Regulatory Authority of India (TRAI) and the Government of India for thought provoking, progressive and commendable policies of unification of license and reduction of tariff, which has driven Indian into becoming the fastest-growing economy and an exponential growth in the telecom sector. For example, until March 2003, there were 12 million mobile phones. Another 12 million were added during the last six to seven months. This means a growth rate of more than 12 times. TEMA appreciated TRAI's forward-looking policy that has resulted in addition of about 2 million mobile phones per month. This, Goyal added, is next to China, where additions are at the rate of 3 million per month. The Indian telecom Industry is poised now to take over Chinese Dragon. The expected investment is about Rs. 50,000 crores over the next two years. Currently, India has about 64 million telephones. It is likely that it will reach its target of 100 million telephones by December 2005, which can easily be achieved even earlier, if the current growth trends continue.

The Council also called for correcting the inverted duty structure currently hampering the industry. The industry is characterized by an inverted customs duty structure, meaning that the customs duty on the finished product is lower than the inputs used to manufacture it. A case in point is of the telecom infrastructure equipment, Rs. 7,000 crore worth of which is imported annually into the country at 5 percent customs duty. Whereas, duties on inputs that go into the manufacturing of this equipment have been retained at 10-30 percent, except ICs at zero percent, making domestic production impossible. Similarly, computer display tubes (CDTs) have been placed at zero percent duty since 2000, whereas, its inputs continue to attract custom duties from 5-25 percent, resulting in a continuous import of around 2 million CDTs annually.

Boosting mobile handset manufacturing
Members of the recently formed Council of the Electronic Hardware Manufacturers Association in India recently highlighted that manufacturing of mobile terminals attracted an excise duty till 2002-03, whereas the CVD was NIL in case of finished terminals. This anomaly was corrected in the budget for 2003-04, i.e., about six months back. India now has several manufacturers for CDMA terminals and supplies have been made to public telecom operators. This is a good start for allowing mobile handset manufacturing to grow in the country.

For GSM equipment, an Indian PSU has entered into a technology transfer agreement with a European company and other companies are in negotiation stages. Until now, GSM terminals were not procured by any telecom operator as the sale proceeds from terminals are required to be clubbed with the revenue for the purpose of license fees. The change in duty structure in 2003-04 has incentivised foreign manufacturers for either passing on the technology to Indian companies or planning to come to India with large investments.

N.K. Goyal, president, TEMA, said: "The situation has changed now. Demand has picked sufficiently and it is understood that revenue on sale of Terminals would be excluded from the definition of revenue for the purpose of license fees. With these measures, we can have good manufacturing base, if the duty structure on cellular terminals remains as it is today, i.e., 10 percent for the time being. This in any case is going to be zero in 2005." The zero duty by January 2005 on the entire IT hardware items due to ITA-I (Information Technology Agreement) of the WTO will be necessitating sector specific policy to in order to sustain manufacturing in the country. TEMA also suggested the formation of a Telecom Finance Corporation so that operators may get finances for procuring local equipment, vis-a-vis imported equipment, which comes with cheaper export credits and vendor financing.

Major challenges faced by industry
According to the Council, we are sitting on demand of Rs. 50,000 crores telecom investment in the immediate future for achieving 100 million telephone landmark. Then, there is an ever-rising demand supply gap, that is likely to mount to Rs. 300,000 crores by 2010 from the current gap of Rs. 40,000 crores. Next, the zero duty regime by January 2005 on the entire IT hardware items due to ITA-I (Information Technology Agreement) of WTO - will necessitate sector-specific policies to sustain manufacturing in the country. Further, free trade agreements (FTAs) also suggest the elimination of duty on consumer electronic items. Implementation of draft national policy of electronic/IT hardware manufacturing should take care of all of these challenges.

According to the newly formed Council, hardware production in India constitutes only 0.6 percent of the global production. The electronics hardware production accounts for 1.6 percent of India's GDP compared with the following figures for some developed and developing countries -- Japan 4.5 percent, USA 5.4 percent, Germany 8.3 percent, China 9.6 percent, Taiwan 15.5 percent and Israel 23.6 percent.

The penetration levels of various electronics/IT hardware products in India are extremely low as against almost 100 percent penetration levels in various developed and semi-developed countries. A comparison with a developing country like China shows how far we still have to go -

                                            India                                    China
TV penetration                 95/1000                               400/1000
PC penetration                9/1000                                 34/1000
Internet subscribers       3.8 million                           24 million
Cellular subscribers       20 million                           >100 million
Telephone main lines    40/1000                               120/1000

China levies a value-added tax (VAT) at 17 percent (likely to be reduced to 14 percent in the near future). Against this, the Indian industry is currently characterised by very high level of indirect taxation of approximately 40 percent. This has created a peculiar situation where an Indian consumer, with a per capita income of $500, has to spend approximately $200 (Rs 9,000) for a 21-inch CTV, whereas, an American consumer, with a per capita income of $35,000, pays only $90 (Rs 4,100) for a 21-inch CTV.

According to the Council, "the high level of overall taxation on electronic products has lead to a growth of grey market in many products." For example, demand for VCD players in the current year is approximately 5 million units, of which 75 percent are being produced in the grey market. In case of computers, the share of grey market is 60 percent. In case of radios/car stereos, the share of the grey market is over 80 percent. A CETMA official pointed out that in case of airconditioners, the grey market accounted for over 50 percent of the production. In the last budget, with the excise duty relief, this share had come down to 20 percent per annum. Thus, the lowering of taxes had resulted in the decrease of the grey market share and an increase in the total market size.

The electronics hardware production in the country has grown at 15 percent and 10.3 percent respectively in the Eighth (1992-97) and Ninth Plans (1997-2002). However, the bulk of the growth has been myopic as it has not come on account of the growth in numbers, but through a technology upgradation in the value chain. As an example, the annual sale of TVs has remained stagnant at 10 million during the Eighth and Ninth Plan periods, but there has been a shift from B&W toward colour TVs. Similar examples exist for other products as well.

We are said to be suffering from a mindset that any reduction in the customs duty on inputs and components may lead to a loss of revenue. This is a misconceived notion. There is simply no justification for importing finished equipment at zero level and keeping duties on components and raw materials at higher levels, and then crib for revenue loss on dual use, etc. India must decide as to whether we need manufacturing in this country, which provides employment to over 200,000 people today in telecom and 500,000 in other electronics sectors. Even the Hon'ble Prime Minister of India, Atal Bihari Vajpayee, said recently that there is no employment in the government sector and that we need industries and economic development for employment. Recent troubles in Assam and Bihar are cases as examples.

Need to blast the China Goliath
The Council said: "Even David needed a stone to Blast Goliath. We are now looking up to the government for giving us a 'stone' so that we may blast the China Goliath and channelise the entire Rs. 50,000 crore investments in India. India has great potential to develop in manufacturing electronics and IT hardware products for the global market, and to expand the domestic market, provided we, as a nation, recognise the same and do not shy away from the responsibilities of same by referring to the WTO, globalisation, liberalisation etc. The new National Electronics/IT Hardware Manufacturing Policy prepared by the ministry of Communication & IT should be implemented.

"Unfortunately the recommendations of the National Taskforce on IT and Software Development, which was set up under the leadership of our Prime Minister and headed by Jaswant Singh in 1998, was implemented only with respect to the software sector and not for the hardware sector. It is for anyone to see the progress achieved by India in the software sector, while hardware continues to languish. The new Electronics/IT Hardware Manufacturing Policy again re-emphasises and resets the original recommendations to the present time when the hardware sector has to face the zero customs duty regime on account of ITA-1 under WTO and FTAs being entered into by the government of India."

The Council further suggests:
i) Implementation of the hardware policy.
All the four industry associations of the electronics/IT hardware sector, namely TEMA, CETMA, ELCINA and MAIT, wholeheartedly support this policy and have no doubt that if implemented fully will lead to creation of demand of US $93 billion with a local manufacturing content of US $62 billion by 2010 as against the present levels of US $15 and US $7.5 billion, respectively. In addition, this industry will provide direct additional employment for 4 million workers.

The current Electronics/IT Hardware Manufacturing Policy is an extension and improvisation of the prevalent modified EHTP scheme that provides sector-specific treatment to address the challenges of the zero duty regime being faced by the electronics/IT hardware industry.

The salient features of the new Electronics/IT Hardware Manufacturing Policy are:

• Under the scheme, units will operate under customs (soft) bonding, similar to EOUs, without export obligation;
• The units will be entitled to import of all capital goods and raw materials at nil duty or can procure from indigenous sources who will get export benefits;
• Sales to DTA by the units will be permitted by paying customs duty equivalent to that applicable on inputs (foregone duty) and an excise duty at 50 percent of the tariff rate. The reduced excise duty is meant to compensate the higher costs borne by manufacturers due to well-known disability factors. This facility has been available to EOUs;
• This policy recommends a payment of 4 percent sales tax on all electronic products and components as already done in the case of IT products;
• The above provisions of the policy to all tariffs and taxes would ensure a composite VAT burden of not more than 17 percent, including CST; and
• The policy provision serve to unify domestic and export manufacturing based on the concept of the foregone custom duty.
  Domestic manufacturing in the zero duty regime is as good as exports.

ii) Telecom Finance Corporation:
Our suggestion is for the formation of Telecom Finance Corporation so that operators may get finances for procurement of local equipment vis-a-vis imported equipment, which comes with cheaper export credits and vendor financing.

iii) Allow mobile handset manufacturing to grow:
The manufacturing of mobile terminals attracted an excise duty until 2002-2003, whereas, the CVD was nil in case of finished terminals. This anomaly was corrected in the budget for 2003-2004, i.e., over six months back. India now has several manufacturers for CDMA terminals and supplies have been made to public telecom operators. For GSM equipment, an Indian PSU has entered into a technology transfer agreement with an European company and other companies are in negotiation stages.

Until now, GSM terminals were not procured by any telecom operator as the sale proceeds from terminals are required to be clubbed with revenue for the purpose of license fees. The change in duty structure in 2003-2004 has incentivised foreign manufacturers for either passing on the technology to Indian companies or planning to come to India with large investments. The situation has now changed. Demand has picked up sufficiently and it is understood that revenue on sale of terminals would be excluded from the definition of revenue for the purpose of license fees. With these measures, we can have good manufacturing base, if the duty structure on cellular terminals remains as it is today, i.e., 10 percent for the time being. This, in any case, is going to be zero in 2005.

iv) Excise set off against service tax for telecom operators:
The clause 8.2 of NTP-99, as given below, very clearly provides that the indigenous manufacturing of telecom equipment will be encouraged, including incentives to operators for using the domestic telecom equipment.

Clause 8.2: Telecom equipment manufacture
"With a view to promoting indigenous telecom equipment manufacture for both domestic use and export, the government would provide the necessary support and encouragement to the sector, including suitable incentives to the service providers utilizing indigenous equipment."

The Council has requested that:

• Service operators may be allowed to set off, against the service tax, the excise paid by operators for procurement of indigenously manufactured telecom equipment; and
• There may be an appropriate deduction in the revenue-sharing license fee to be paid by the operator in case they use indigenously manufactured telecom equipment. We suggest a benefit of deduction of one-third of the cost of using indigenously manufactured telecom equipment from the gross adjusted revenue for levying revenue-sharing charges.

Other than these, concerned associations are taking up specific recommendations separately.