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Sharpen the image

FM needs to design a uniform classification for convergence products, tackle excise disparity and do away with FBT, writes Ravinder Zutshi, Deputy MD, Samsung India.

india Updated: Feb 28, 2006 12:04 IST

Unlike China, India has chosen to follow the economic model where growth is driven by domestic demand. One of the segments that is seen as an index of domestic consumption in most evolving economies is clearly the consumer durables and electronics industry. Last year, the consumer durables industry in India recorded a growth of around 6 to 8 per cent. But growth has suffered at the hands of factors that need to be addressed at the policy level.

Some of these factors that had an impact on the industry were transitional linked mostly to the implementation of the Vat regime. The teething troubles with Vat, along with steel and input cost hikes, put pressure on manufacturers from the first quarter onwards, so that the year’s growth was checkered. While the high-end, technology-oriented categories in the market like flat TVs, fully automatic washing machines, frost-free refrigerators did well, in overall terms, the sectors achieved modest growth levels.

Where the consumer electronics industry needs a lot of support from the government is in the removal of some anomalies that are slowing the growth of the industry. In the era of digital convergence, differential taxation policies for IT and consumer electronics products creates distortions in the system. For instance, the import duty on inputs of computers and mobile phones is zero, while the customs duty on inputs of television and other consumer electronics products are high. The government has to treat all electronic hardware as one. A uniform tariff and tax structure must be created for all electronic hardware.

A bone of contention in the industry is the disparity in the excise structure. Where mobile phones and personal computers attract zero per cent duty, colour monitors and colour televisions require manufacturers to pay an excise duty of 16 per cent — a staggering lack of parity. Reducing the excise duty on hardware to 8 per cent will go a long way in helping the domestic industry and help in the growth of these categories.

While IT products are charged Vat at 4 per cent, non-IT products are facing a 12.5 per cent tax. With the differentiation fading between IT and non-IT, the government must have a level Vat for the total electronic sector, including components and parts, at 4 per cent.

Clear classification is urgently required for all convergence products based on their predominant feature. For example, the few seconds or minutes of the digital recording function in any digital still camera, still does not convert it into a ‘handycam’. Therefore, the applicable benefit of zero duty on digital still cameras should be given to importers.

The peak rate of customs should ideally be reduced from the current level of 15 per cent to 5 per cent. This will help leading technology products like plasma panels, currently imported, to be made more affordable for consumers.

The much discussed Fringe Benefit Tax (FBT) is an area of concern. The consumer durables industry relies heavily on a slew of promotions and advertising activities to drive sales, especially during festive seasons. But since 2005, the FBT has to be paid on freebies given to consumers during promotions. It is also slapped on payment to celebrities used as brand am bassadors by corporates. The tax on both these elements is futile. It must be revoked since there is no benefit accruing to employees as a result of these promotional activities.

The government also needs to arm domestic manufacturers, especially in the wake of the free trade agreements signed by India with the South-east Asian neighbours. Under the free trade agreement with Thailand, for in stance, colour TV sets and picture tubes have been included in the early harvest schemes.

In simple terms, customs duty on these products imported from Thailand will go down from the current level of 6.25 per cent to zero this year. However, inputs like glass parts that go into the manufacture of a picture tube still invite 25 per cent duty. More items included under such agreements and similar agreements with other countries will actually force many local manufacturers to shut shop as a result of the inverted duty structure.

The industry is suffering at the hands of inverted duty structure and high taxation. While China levies a Vat at 17 per cent, our industry pays an indirect tax which can go up to 40 per cent. This is hindering the growth of domestic manufacturing in the country.

On a broader level, the joint recommendation made by all the industry associations to the government is the implementation of the Hardware Policy drafted by the Ministry of Information Technology. Support from the government on these issues will boost the domestic industry and help it sharpen its competitive edge.

(The writer is Deputy MD, Samsung India)