IT Taskforce
Basic Background  Report
(BR-2)
8th August 1998



X. HIGH-TECH HABITATS

International experience has shown that hi-tech industries flourish essentially in the rural hinterland adjacent to cities with modern telecom and communication infrastructure and top class hi-tech educational/research institutions. India will promote such 'Hi-tech Habitats' in the rural hinterland adjacent to suitable cities. For this purpose suitable autonomous structures will be designed and progressive regulations will be framed to facilitate infrastructurally self-contained Hi-Tech Habitats of high quality. Initially, four such Hi-Tech Habitats shall be planned and implemented in the rural hinterland of the cities: Calcutta, Chennai,Trivandrum and Allahabad. Several such Hi-Tech Habitats can be viably set up by empowering the State Governments to autonomously nucleate them within a technologically progressive and administratively liberal use of guidelines to be prepared by a special Working Group on Hi-Tech IT Habitats to be set up by the Task Force.

For the above some of the States may emulate Subic Bay of Philippines or Shenzen as follows:

• Equip to face competition- not fight for survival

• Incentives to encourage investment

• Merge manufacturing facilities for domestic and exports production

• Harness economies of scales.

For enabling this State Governments may consider:

• Identifying Areas- minimum 40 sq.Kms in the proximity of Seaport/Airport

• Focusing on speed-self assessment customs clearance-completely duty free transfers within areas-no paper work-no permission

• Giving incentives over and above Central Government

On the basis of the reports prepared by the Department of Electronics, Government of India, the following recommendations are suggested:

1. Summary of the Concessions/Incentives sought for Hi-Tech Habitats:

i) Exemption of Interest Tax under Section 10(15)(iv) to be amended to include high tech park/megafabs.

ii) Income Tax

a) for assessment purpose consider unsold unitized goods as business assets

b) Income on such assets be assessed on actual accruals and not on notional basis.

c) Depreciation, repairs be taken on actual basis and not on notional basis

iii) Tax holiday under Section 80IA be extended to cover high-tech parks.

iv) Business assets of high-tech parks including residential units be exempted for wealth tax.

v) ECB guidelines should be relaxed further. The average tenor of the loan is stipulated as 7 years without any option for prepayment. This needs to be reduced to be an average tenor of 3 years with a provision for prepayment.

vi) Domestic banking system should be encouraged to finance approved high-tech parks and not consider them as a real estate activity. It may consider loan at soft terms for this activity.

vii) Import concessions:

a) Import of captive power plants by high-tech parks be allowed at the same rate as applicable to the power generation project (resulting in duty reduction form present 39.7% to 22%).(It is preferable to completely waive the duty)

b) Import of infrastructural facility like data/communication networks being provided in the high tech park be allowed confessional rate of import duty for infrastructure.(It is preferable to completely waive the duty)

2. Chip Manufacture and Mega FAB

Efforts should be made to locate chip manufacturing facilities in India in collaboration with leading international partners. The following proposal is from the Department of Electronics, Government of India:

The background:

1. The World IC industry is presently US $140 billion which is expected to grow to about Us $270 billion by the turn of the century.

2. The Indian semiconductor production at present is about Rs.230 crores out of which IC production is about Rs.60 crores.

3. Given the electronic equipment target production of Rs,55,000 crores by the terminal year of the ninth plan, the optimistic market for ICs in India would work out to be Rs.8,000 crores. Keeping in mind the shortfall in equipment production, the lag of equipment designs, the tied 'SKD' assembly etc. the pessimistic accessible IC market in India is expected to be around Rs.3,500 crores.

4. India presently bas some strategic capability but very little commercial capability in ICs.

5. There are chances for India to progress in IC area in Bipolar Analog ICs, Standard Logic ASICs, ASSPs etc. only if the present constraints of policy, tax regime, industry structure, finance costs, etc. are removed as recommended in the Report.

6. Global scale operations including exports are possible in India in back-end operations like assembly and test, and design if the constraints are removed.

7. Fabs for basic products are possible only if Government removes constraints on inputs, create infrastructure specially for this area takes special initiative for attracting the multinational Joint-ventures. Modern fabs for advanced VLSI including exports would only be possible if multinationals are attracted to place majority investments. This will require a special package of incentives and financial support in various forms.

8. If the constraints are removed and Government takes initiatives for encouraging joint-ventures for fabs, a target production of about Rs,.3000 crores aimed by the terminal year of the IX Plan can be aimed.

9. Government should plan for establishing atleast two modern fabs as joint ventures during the ninth plan period. In addition to increasing the production by an order of magnitude, this will promote the growth of chip applications and emergence of new products and advanced technologies in the country, encourage local production of input materials, act as driving force for improving infrastructure for high tech. Industries and generate sizable export revenues in the long run.

10. As the above plans are executed and local activity in fabrication increases, there will be a scope for an independent mask-making facility. This can be accomplished viably by spinning off into a separate facility the existing mask units and upgrading the same.

11. Government should create a resource facility for IC's for providing processes improved at R&D institutions, trying out new ideas, prototyping of new products before transferring to industry and human resource development.

12. Manpower development for microelectronics needs to be undertaken through introducing proper courses at graduate and post graduate levels, special courses, training at the resource facility, training abroad, industry consulting etc.

13. Technology development activity in various, institutions needs to be strengthened for building up capabilities.

14. Funds to the tune of 5,000 crores need to be invested in the country for up gradation of existing facilities , establishing new modern production, establishment of a resource facility, manpower training and technology development. Government contribution can be of the order of Rs.2,500 crores.

Government Actions Required

• Indirect taxes on all electronic products to be reduced to accelerate the market-Recognise microelectronics as a vital core industry

• Import duties to inputs on microelectronics to be zero or near zero.

• Hi-tech infrastructure to be established as Technology Parks -Subsidised interest rates for microelectronics financing.

• Attract global investments through incentives as in Malaysia/Thailand.

• Restructure semiconductor sector by consolidation in a few units.

• Fair and fast customs procedures and approvals

• Strengthen technology development in R&D institutions.

• Create a resource facility for IC prototyping and training.

• Allocate Rs.2,500 crores in the Ninth Plan period to this area.

Summary of the concessions/incentives sought for Megafabs/microelectronics units:

Tax Benefits

i) Exemption of corporate income tax for certain years ten(10) years with permission to carry forward losses and deduct them as expenses for upto 5 years.

ii) In case units are located in specified zones 50% reduction of income tax for five years after the termination of normal income tax holiday.

iii) Exclusion of dividend derived from promoted enterprises from taxable income during the corporate income tax exemption period.

iv) Allowance to deduct upto to 25% of the investment cost on installing infrastructural facilities from taxable corporate income.

v) Exemption or reduction of major taxes including property tax, sales tax, import duty etc.

vi) Accelerated depreciation (the present rate is 25% which could be enhanced to 60%).

vii) an allowance to deduct from taxable corporate income an amount equivalent to 5% of an increase in income derived from exports over the previous years, excluding the cost of insurance and transportation for 10 years from the first date on which income is earned.

viii) An allowance equal to double the cost of transportation, electricity, water supply for deduction from taxable corporate income for 10 years from the first day on which income is earned.

Guarantees

i) Against nationalization

ii) Against state monopolization of the sale of product similar to those produced by the promoted projects.

iii) Against price controls

iv) Against Customs controls.

Others

i) Procurement of indigenous raw materials, components or any other goods by the manufacturer be exempted for sales tax, octroi etc.

ii) Permission to bring in foreign nationals to undertake investment feasibility studies as also foreign technical experts to work on promoted projects.

iii) Import/export duties and policy to be at par with EPZ units.

iv) All import/export consignments to be given green channel.