Make in India: Incentives for Electronic System and Design Manufacturing
By: Oliver Gonsalves, India Briefing, Dezan Shira & Associates
Posted: 23rd July 2018 09:14
Strong domestic consumer demand due to India’s rising disposable incomes and digitalization is spurring the need for developing indigenous electronics production capacities. Currently, almost 75 percent of this demand is serviced through imports.
With demand far outstripping supply, the government is intent on setting up more local manufacturing and assembling units through a combination of tax sops, industry-wide incentives, ease in foreign direct investment (FDI) rules, and raising import duties.
Consequently, the Electronic System and Design Manufacturing (ESDM) sector presents foreign investors entering the Indian market with improved prospects.
The government hopes to reduce all electronic imports into India by 2020. There is good reason for this ambitious goal.
Going by current market trends, by 2020, India’s trade deficit due to electronic imports will exceed the deficit incurred by crude oil imports.
With local demand estimated to reach US$400 billion in the next two years, the ‘zero import by 2020 policy’ aims to facilitate the right business and investment conditions for greater domestic participation in the ESDM sector. The policy also seeks to incentivize the establishment of local operations by foreign firms hoping to penetrate the rapidly expanding and diversifying Indian market.
Towards this end, India’s tax regulator, the Central Board of Indirect Taxes and Customs (CBIC) imposed a 10 percent duty in April on imports of populated printed circuit boards (PCBs) and other essential mobile phone components. (PCBs contribute to nearly 50 percent of the value of the phone.)
Raising import costs is part of a federal plan (Phased Manufacturing Program) that intends to expand local manufacturing capacity.
It seems to have paid off.
In June, Xiaomi Inc. confirmed its plans to manufacture 100 percent PCBs by September this year. The company has set up a Surface Mount Technology (SMT) plant in Sriperumbudur, in the southern state of Tamil Nadu, in partnership with the Taiwanese contract manufacturer, Foxconn.
Through its investments into the smartphone manufacturing sector, Xiaomi will create about 50,000 job opportunities in India.
Incentives for manufacturing investments in ESDM
The ESDM sector in India consists of the following six segments –
- Semiconductor design and manufacturing;
- Electronic components manufacturing;
- Information technology (IT) systems and hardware;
- Telecom products and equipment;
- Consumer electronics; and,
- Strategic electronics.
Federal policies, such as the Modified Special Incentive Package Scheme (M-SIPS) and Electronic Manufacturing Clusters (EMC) aim to expand production capacity in India as well as improve industry competitiveness to meet domestic demand and fuel Made in India exports.
We outline the key industrial incentive schemes for the sector below.
M-SIPS offers manufacturers a subsidy of 25 percent on capital expenses; in Special Economic Zones (SEZs) the subsidy is 20 percent.
The scheme also reimburses excise payments and additional duties paid on the import of capital equipment in non-SEZs.
Further, all central taxes and duties are reimbursed for 29 industry verticals in high capital investment projects.
These incentives are available for 10 years from the date of approval. M-SIPS will be operational till July 2020.
Electronics manufacturing clusters
Manufacturers within EMCs receive financial assistance for 75 percent of the cost of infrastructure in brownfield clusters and 50 percent of the costs for upgrading infrastructure and logistics in greenfield clusters.
The state of Karnataka, in south India has established clusters in Bangalore and Mysore. The state of Maharashtra, in the west, has set up clusters in Pune, Nashik, and Aurangabad.
India offers a federal grant-in-aid (GIA) for micro, small, and medium enterprises (MSMEs) by up to a maximum of US$14,715.
Preferential market access
The Preferential Market Access (PMA) is a federal scheme guaranteeing preference for locally manufactured products during procurement for government projects.
Under this scheme, the federal government guarantees to procure a minimum of 30 percent of its requirement for a project from a manufacturer producing locally.
Federal initiatives such as Digital India, the Aadhaar project, and Smart Cities plan are designed to act as magnets for FDI in India’s ESDM industry.
Funding for electronics development
India has set up an Electronics Development Fund (EDF) focusing specifically on the ESDM sector to achieve an ambitious target of ‘Net Zero Imports’ by 2020.
The EDF is a US$2 billion corpus – a ‘Fund of Funds’ – offering angel investments, seed funds, and venture capital funding for electronics, nano-electronics, and IT projects at the research and development (R&D) stage.
India’s incentives for exports
The Merchandise Export from India Scheme (MEIS) offers export incentives of up to a maximum of five percent on locally manufactured products like refrigerating equipment compressors, fully automatic washing machines, and color television sets.
India is also in the process of amending its 2012 National Policy on Electronics (NPE) to create a viable supply chain of raw materials and other necessary components, aiming at producing over 60 percent indigenous content.
The creation of such an ecosystem will allow companies to export US$80 billion worth of products by 2020.
Foreign investments in ESDM
India’s telecommunications, computer hardware, and software segments have been the largest recipients of FDI since 2000.
However, most of this investment is channeled into the telecom and internet services sector, instead of manufacturing.
This is in major part due to India’s transition to the 4G network, overseeing an expanding digital ecosystem.
India now has the second largest mobile telecom network in the world after China.
To inject momentum into the manufacturing domain, the federal and the state governments of Haryana, Andhra Pradesh, Karnataka, Tamil Nadu, and Gujarat are pushing for the local production of mobile phones and other electronic systems and devices, offering tax breaks to companies setting up manufacturing units in India.
For instance, the state of Gujarat fully refunds stamp duty, registration fees, and electricity duty (for a maximum of five years) – which are paid by the investing companies.
It also charges only US$0.015 for every unit of electricity during the first five years of establishment.
In the case of greenfield projects, Gujarat will offer up to 25 percent in project assistance, with a ceiling of US$1.45 million.
These have already had an impact: in 2014, imported mobile phones satisfied 79 percent of domestic demand; it fell to 26 percent in 2016.
In 2017, domestically produced electronics in India generated revenues worth US$75 billion. Revenues from the mobile phone manufacturing alone comprised about 25 percent of this revenue.
The blend of tax breaks and incentives has allowed India to outpace Vietnam to become the world’s second largest producer of mobile phones.
Among leading foreign players in the Indian market, Xiaomi, the Chinese smartphone maker, has set up six manufacturing plants across the states of Uttar Pradesh, Andhra Pradesh, and Tamil Nadu – since 2016. As mentioned earlier, its latest plant, located in Tamil Nadu, will produce PCBs.
The company announced in late May that it also plans to launch its Made-in-India televisions by Diwali this year, again in partnership with Foxconn; manufacturing will begin in July-August.
Other Chinese companies like Huawei and the Lenovo Group have tied up with Flextronics, an American multinational electronics manufacturer, at its facilities in Sriperumbedur, Tamil Nadu to increase the local production of their respective mobile phones in India – the Honor and Motorola brands.
During his first official visit to India, South Korea’s Prime Minister Moon Jae-in inaugurated the country’s electronics giant, Samsung’s 35-acre mobile manufacturing plant in Noida, Uttar Pradesh.
India’s Prime Minister Narendra Modi hailed the move as a Make-in-India success. The Noida plant will manufacture other high performing Samsung consumer electronics, including refrigerators and flat panel televisions, besides its flagship phones.
This article was first published on India Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.
For inquiries, please email us at email@example.com. Further information about our firm can be found at: www.dezshira.com.