The Hindu Business Line : `Tax anomalies limit AC penetration in market'

THE domestic air-conditioners segment may be growing at a healthy 20 per cent over the past few years, but industry watchers point out that the momentum is still much below its potential largely due to the taxation anomalies that exist in the sector.

"In fact, despite the current penetration levels being low, the growth in sales - both domestic and in the overseas market — is limited. The domestic market has the potential to grow at upwards of 35 per cent provided the right environment is provided," points out Mr Naishad Parikh, Adviser to the Refrigeration and Air-conditioning Manufacturers' Association (RAMA) and former Managing Director of Hitachi India.

Air-conditioners sales are estimated at 9.5 lakh units in the domestic market and exports at 1,00,000 units. Compare this with China, which has annual domestic sales of 14 million units and exports of 7 million-8 million units.

Mr Parikh points out that though prices of air-conditioners have decreased significantly over the past years, it would not be possible for the prices to climb down further at the current level of taxation. The RAMA, in its pre-budget memorandum, has asked for the removal of 8 per cent SED on air-conditioners and also reduction in the customs duty on basic inputs such as copper, aluminium and plastic to 10 per cent.

These steps would help the Indian AC industry to achieve scale, which is a pre-requisite for it to be able to compete globally. The current tax structure has also resulted in companies rushing to set up units in tax havens such as Uttaranchal.

"While in 2004, 40-45 per cent of the ACs produced in India were in tax havens, we expect the figure to increase to 75 per cent this year," Mr Parikh said.

Meanwhile, the industry is also hoping for a level-playing field to be provided to it in the forthcoming Union Budget in view of the free trade agreement (FTA) with Thailand. The air-conditioners category is present on the early harvest scheme list with Thailand. The country has substantial installed capacities for ACs, and lower priced AC imports from there could pose a threat for AC manufacturers in India.

In fact, the Japan-based Daikin has already shelved plans to set up a unit in India and plans to use its base in Thailand to cater to the Indian market.

Consumer durables manufacturers, Electrolux and Haier, too are reported to be exploring the possibility of using their Thai units to export to the Indian market.

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