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



IV. FISCAL AND FINANCIAL ISSUES

The Soft Bonded IT Units will be importing capital goods as well as raw materials and components for the manufacture. Input sourcing may be either from abroad or from within the country. Various issues regarding customs duty, draw backs, CVD, MODVAT, Sales Tax, depreciation and tax will have to be addressed in the new context. Many of these issues also pertain to EOU/EPZ/MEHTP, but can be adopted or modified to suite the S-BIT Units also. The issues and possible solutions are outlined below for enabling modification and fine tuning as well as additions and deletions:

1. In the WTO-ITA schedule given in Policy No. 20 in the Extra Ordinary Gazette Notification, Part-I, Section-I, No. 160 dated July 25, 1998, a schedule of reduction to zero duty is given in the form of a time limit. However, it does not preclude advancing the time schedule of any item further. Different associations and manufacturers have indicated different schedules which are claimed to be optimal for the hardware industry. Some of these suggestions are given below:

Suggestion-1:

All raw materials for components : Zero percent with immediate effect
All CG : Zero percent with immediate effect
Duty on components : 1-1-99 unchanged (except for 20(a))
2000 : 50% reduction
2001 : Zero duty




Duty on finished goods:

1-1-99 : Unchanged
1-1-2000 : Unchanged
1-1-2001 : 50% reduction
1-1-2002 : Zero duty

:




Suggestion-2:

  • Declares zero customs duty (basic plus CVD) on electronic components required for manufacture of Colour Monitor, Mother boards, Add on cards, Scanners, Printers, Hard Disk Drive, Floppy Drives, Power Supply Modules and Cabinets.

  • The present customs duty applicable only on ICs of value above Rs. 1000. The import of all ICs should be duty free except for those actually manufactured in India.

  • The present customs duty on finished computer peripheral devices and elements falling under tariff heading 84.71 and 84.73 be kept at present level and not reduced till the year 2002.

Suggestion-3:

  • All CG and Input to components manufacture and populated boards/parts/subsystems manufacture be made zero with immediate effect.

  • Duty on finished goods be made zero by the year 2001.

Suggestion-4:

  • Declare zero customs duty on capital goods and raw materials for electronic component industry with immediate effect.

  • Give the component industry a 'deemed export industry' status.

Suggestion-5:

All supplies from domestic industries be treated as 'deemed export'

Suggestion-6:

Policy No. 20 on page 29 of the Extra ordinary Gazette of India No. 160, dated July 25, 1998 concerning WTO-ITA schedule, Section 20(a) shall apply except for the interpretation of 'by 1-1-99' to accommodate the phrase 'with immediate effect'.

4. Capital Goods:

  1. All Capital goods are permitted to be imported free of import duty.

  2. Sale of capital goods within a soft bonded IT unit or between units shall be free of any licensing.

  3. Capital goods imported should be permitted to be disposed off if the importer has fulfilled the obligations against their import ; if there are no obligations, on the consideration of competitive productivity and modernisation.

  4. Units which do not use duty free capital goods need not be bonded; however, they shall be allowed to operate as 100 percent export operation within the unit and to follow all other procedures applicable to S-BIT units.

  5. Specialised furniture/fixtures which are appendages to capital goods shall be allowed to be imported duty free.

  6. Specialised airconditioning equipment which are pre-requisite for a dust-free and controlled temperature environment, essential for achieving the quality levels of the end-products being manufactured, shall be permitted to be imported as capital goods.

5. Levies Refund: As CST and Octroi and other non-refundable levies considerably reduce competitiveness of Indian IT hardware export, especially in view of the cascading effect of these levies on domestic inputs, the CST which is a central levy can be refunded to the exporters.

6. Deemed exports (and supplies which qualify as deemed export) shall be treated at par with physical exports and all the benefits under the policy, income tax benefits and benefit under any other provisions shall be made available on such supplies/exports.

7. Telecom products manufactured in the country and supplied against Telecom Products, shall be granted deemed export status by adding the word 'Telecom' in para 10.2(G) in the EXIM Policy.

8. The license holders sourcing the inputs from indigenous sources/canalising agencies/S-BIT units in lieu of direct import shall have the option to source the same against advance release orders denominated in free foreign exchange/Indian Rupee. In such cases, the licenses shall be invalidated for direct import to that extent and the permission in the form of ARO shall be issued which will entitle the supplier to the benefits of deemed export.

9. The license holders can avail all the facility of back to back inland letter of credit in accordance with the procedures specified in the Handbook, Volume-I instead of applying for an advance release order.

10. Draw-back shall be available in respect of any of the duty paid on materials, whether imported or indigenous, used in the goods exported as per the all Industry/brand rate fixed by the Ministry of Finance.

11. All parts and IT products shall be exempted from the special additional duty of 4 percent.

12. Duty free advance license shall be given against an export commitment exceeding 40 percent of the total production. Import of raw materials, intermediate components, consumables, parts, accessories, mandatory spares not exceeding 5 percent of the CIF value of duty free licence and packing material (hereinafter referred to as 'inputs') may be permitted for import against import licence. Duty free advance license shall be granted to such manufacturers - exporters, required for the manufacture of goods without payment of basic customs duty, additional customs duty as well as any special duties. The holder of duty free advance license shall have the option to pay additional customs duty, if any, in cash as well. Manufacturers registered in the S-BIT units who have taken such export obligations and registered with Central Excise are eligible to obtain such duty free advance licence. Such a license shall be issued with actual condition and material imported therein shall not be transferable. Export obligations shall be completed within 18 months from date of issue of the license. The monitoring of export obligation shall be done at the time of closing of the licence.

13. The Customs Act shall be made in conformity with the Export-Import Policy relating to EPZ and made applicable to S-BIT units. Para 9.13(A) of the Export Import Policy (page 34) specifies that all items brought into the EOU/EPZ/EHTP are eligible for exemption of the Central Excise Duty on capital goods, components and raw material. However, the Central Excise tariff 1997/98 General Exemption 40 (page 120-125) has added a rider that this exemption is valid only if such capital goods are used in the production or manufacture of articles. As everything brought into the S-BIT units is directly or indirectly used in the manufacture of goods, the wording 'brought or manufactured' should be deleted as it does not serve any larger purpose.

14. There is considerable delays in the registration of the licence even after producing the original shipping bills and bank realisation certificates, because the customs stipulate confirmation letter from the Port of export even if it is within the same place. In view of this, the customs shall accept the original shipping bills and bank realisation certificates.

15. For refund of Central Excise duty paid on packing materials, the complicated Rule 12(1)(b) shall be replaced by a simplified procedure for merchant exporters by filing of AR-5 at the time of shipping because the Central excise authorities anyway supervise the stuffing of export of goods and sealing of containers. The issue or Rate Letters shall be decentralised and local excise commissioners shall be empowered for this purpose.

16. Blocked CVD where applicable, in the context of the operation of S-BIT units, the Assistant Commissioner of Excise shall refund the same expeditiously by way of cheques and they shall not do so by way of permission to credit it back to RG-23 Register.

17. Excise and MODVAT: In the eventual zero duty regime, allowing of zero excise duty will not permit MODVAT offset for those units which still choose to be under DTA. This will be equivalent to allowing excise duty for local manufacture and concomitantly exempting import alone from CVD as local makers offset the excise paid as MODVAT. This can be overcome by declaring zero excise duty with the same procedures as for non-zero excise wherein excise clearance certificate is issued on the 'notional' payment of zero excise duty. This certification can be utilised for MODVAT claims. This indirect and artificial procedure becomes essential because full VAT is not likely to be in place for a long time unless there is a complete change of mind-set in all the State Governments who have to do in addition, central sales tax/local sales tax harmonisation. They would also be required to remove Octroi and entry tax which may also not take place uniformly in the various States. In addition, it may be proposed that a scheme for refund of customs duty or any other special duty for the input used for manufacture of goods for exports, may also be introduced on the lines of the MODVAT presently applicable for Excise Duties/CVDs. The Computer Network are used by the Excise authorities for verifying of books related to MODVAT for the units who are also exporters and claiming rebate under MODVAT for inputs used for export production. This facility is required to be further strengthened and augmented to include the custom duties paid on the inputs for use in production of the goods for export. This will facilitate exporting units in getting the claims immediately into their books. This may be further simplified when electronic fund transfer over computer networks become operational.

18. Transfer of accumulated MODVAT Credit from one unit to another unit of the same company may be permitted regardless of whether CVD at the time of import has been paid by cheque or by cash or by debit in DEPB.

19. The 90 percent depreciation should be available over three years in view of the fast obsolescence of IT products. Accordingly, the rate of depreciation every quarter should be enhanced.

Customs shall allow the depreciation on CIF value as that is the value on which the duty exemption is allowed in the first place or the value considered for export obligation purposes.

The depreciated value of capital goods should become zero after the export obligation is met or after the exigencies of competitive productivity and modernization essentially demand the same.

20. All IT product ventures in S-BIT units shall be exempted from Income Tax for a period of five years provided, the unit commences production by March 2000.

21. A 20 percent investment subsidy shall be given for all new investments over Rs. 30 crores. ($ 7 million) in the IT product manufacture