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



II. CONCEPT OF 'SOFT BONDING'

In 1997, when the IT hardware industry was getting de-emphasised by a general hostile policy environment and the impact of wrongly balanced structure of the original version of the Electronic Hardware Technology Park (EHTP), decisive steps were taken towards creating a duty free area for IT hardware manufacture with a scheme called, 'Modified EHTP' (MEHTP). This was a preparatory step for the IT hardware industry to face an eventual zero duty regime. This scheme permitted bonded EHTP units to sell 50 percent of their products in the DTA on full payment of customs duty and CVD.

The MEHTP Scheme makes the following liberal provisions:

It gets all its parts and capital goods without payment of any import duty.

• All procurement from within the country is treated as deemed export.

• All purchases in India are free from excise duty, entry tax, sales tax and in several cases, Octroi.

• The manufactured item is sold to the DTA on payment of excise duty equivalent to the import duty plus CVD.

• Items cleared for DTA, exported items and export targetted items are all respectively identical in all respects.

Even with the above salubriant climate, the Indian IT hardware industry was not, in general, competitive with respect to other competing countries like Korea, Hongkong, Philippines, Singapore and Taiwan. It is feasible to create such a competitive base in the country, if the concept of a 'Soft Bonded Unit' for unified domestic and export manufacture is brought about, elaborating on a prescription made by MAIT.

1. IT products are permitted to be manufactured in a unit in bonded area as in the case of EOU or MEHTP, but these units can sell even upto 100 percent of its production within the country on the payment of import duties and CVD according to a particular suitable criteria.

2. As with EOU/MEHTP, all the purchase transactions will be free of sales tax, entry tax, excise duty and octroi.

3. The Harmonised Serial Number (HSN) which the country has already adopted for all import, export and revenue purposes, shall be insisted upon to give a clear, unambiguous classification which does not need interpretation when sold in the DTA with respect to what is being manufactured.

4. All clearances will be on the basis of only self-declaration without insisting upon any permits, thereby making DTA access simple. Here, the Green Channel import clearance is required to be broadbanded.

5. Only products in the Soft Bonded IT Unit (SBIT) will have access to DTA for which broadbanding applies within a four or six digit HSN.

6. Supplies from DTA to the Soft Bonded IT Unit will be treated as deemed export.

7. Surplus material can be re-exported. When sold in DTA, applicable duty will be payable.

8. A Simple bank guarantee or a legally valid undertaking for self-declared guarantee is accepted for import clearance as it is duty-free.

9. All authorisations, where essential, are given from a single window.

10. Addition of new items for manufacture through a Notification and not by permit.

11. All banking will be allowed in hard currencies.

The above concept of Soft Bonded IT Unit can address several of the present problems encountered. In particular,

• In the limit case of the zero duty regime, the excess quota to DTA loses significance.

• An intrinsic incentive for manufacturing is built in.

• The dual use items will be duty-free to manufacture.

• Incentives for export to the degree required can be extraneously built in.

• Indian units will be on a level playing ground with competing foreign manufacturers.

• Foreign investment for IT hardware manufacture will flow because of the large potential market in India and for realising competitive edge and scale of operation. They will also bring in considerable export production without having to commit any quantum of exports a-priori.

• Having such duty-free areas within the country supplying to DTA with Indian labour and Indian capital, makes much more national economic sense than the alternative of having to sacrifice its entire hardware industry to imports.