Taxman looks to ensure only genuine manufacturing
With the number of mobile phone shipments to India surging to 275 million in 2014 from 183 million in 2011, and overall electronic imports—including mobile phones—expected to cross $300 billion by 2020, the government is going all out to woo global manufacturers like Foxconn. And Maharashtra, the state that has bagged the biggest investment promise, has offered the Taiwanese firm a slew of incentives, from concessional loans with a 10-year moratorium to capital subsidies, land on lease for 95 years, low-cost electricity, and a lot more. Indeed, it was to encourage local manufacturing of mobile phones that the finance minister brought in a 1% excise duty for local production while hiking the countervailing duty (CVD) to 12.5% in the budget—it was left at 1% in case no Cenvat credit was availed. But since importers don’t avail of Cenvat credit, they also demanded the 1% CVD facility—since this would finish off the advantage for local manufacture, the taxman clarified in July that such concessional duty would be available only to manufacturers. In the meanwhile, the taxman also found that some mobile phone manufacturers were simply dis-assembling phones in China, importing them in semi-knocked down (SKD) form and putting them together here—what is colloquially called ‘screwdriver technology’—without paying the 12.5% CVD.
With the taxman examining such imports closely, as FE reported on Wednesday, mobile phone manufacturers have asked for a clarification on what kind of manufacturing will be considered kosher to avail the differential duty.
The rules are complicated and there are judicial pronouncements on the applicability of the law, but ultimately the applicability of CVD should be based on the proportion of value addition in India—and the principle of differential CVD applied to mobile phones can be extended to other electronic products as well. While getting full-blown manufacturing—which includes setting up of component factories and even a fab plant to make chips—can take more than a decade, going after screw-driver technology will ensure firms import CKD kits and do some value addition here. In the Sony case, which some SKD-manufacturers incorrectly cite, the reason why import duties were not levied on components was that the firm was ‘populating’ the circuit board in India, so there was value addition being done. Firms manufacturing in India also need to, over the medium-term, move to local design of some part of the hardware and even creation of software—it is worth keeping in mind that though Foxconn assembles most Apple phones, the lion’s share of the profits goes to Apple that designs the phones. It is true that the bulk of new phones being sold in India are Androids where Google is designing the phone, but many manufacturers like Cyanogen are now producing ‘forked’ Androids where Google’s basic software is being modified significantly—so there is considerable scope for R&D. In the ultimate analysis, of course, no one including Foxconn is going to manufacture in India for just tax arbitrage—the eco-system of component manufacturers will take a decade or more and infrastructure issues like land/water/electricity have to be fixed—but it would be a pity to allow SKD-based manufacturers to take away this initial advantage.