The Hindu Business Line : In India, taxes add 20-25% to the cost of computers

The phasing out of CST as a precursor to GST should also give a boost to the industry and benefit customers since it could cut down the costs of sourcing and distribution significantly.

Dell's new manufacturing facility in Chennai, billed `the most comprehensive presence in the world outside the US', is expected to be operational by July with a capacity of 4 lakh units per annum. With that in place, it may become less necessary for Dell to source from its manufacturing facilities in China and Malaysia for sales in India.

Last month, the company's founder, Mr Michael Dell, was in New Delhi. He felt the tax structure in India is not encouraging for computer manufacturers, and said: "India is losing investments because of its tariff structure." Citing as example how one of Dell's component suppliers was investing $5 billion in Vietnam, Mr Dell was positive that scores of the company's suppliers might set up shop in India if the duty structure were rationalised to make local manufacturing attractive vis-à-vis imports. In India, taxes add 20-25 per cent to the cost of computers, he rued.

"Several name-brand electronics companies, including Hewlett-Packard, Motorola, Dell and Flextronics, are manufacturing in India or have plans to, but most component suppliers are cautious about investing in India. Buyers will have to import most parts," writes James Carbone in an April 19 dated story on www.purchasing.com. That the supply base in India is `relatively weak, especially for electronics,' is the opinion of Mike Fawkes, senior vice-president of operations for Palo Alto, California-based Hewlett-Packard's imaging and printing group, in the article. "Importing components is not a good long-term strategy because of the costs, logistics and general inefficiencies," comments Carbone.

The 20-25 per cent tax may come as a surprise to many who think that our taxman is as benevolent towards computer hardware as with software exports. "On import of components (generally, computer parts), duty payable is as follows: Basic Customs duty: `nil'; countervailing duty (CVD): 16.48 per cent; special additional duty: 4 per cent; Customs cess: `nil'; thus, total effective duty on import is 21.14 per cent." Thus explains Mr Siddharth Mehta, Manager, Indirect Tax, Tax & Regulatory Services, KPMG India, in an interaction with Business Line. "Then, VAT on sale of components is 4 per cent," he adds. "In certain cases, the special additional duty of 4 per cent and VAT charged are recoupable, in which case the cost would come down."

Excerpts from an interview:

How have the duties/taxes on computers changed over the recent past?

Computers, being covered under Information Technology Agreement-1 (ITA-1), have enjoyed exemption from basic customs duty on import since past few years. However, total customs duty payable on import of computers have moved from 11.28 per cent in 2005-06 to 16.85 per cent 2007-08 largely due to other customs duties levied in lieu of local duties/taxes suffered by local manufacturers.

As regards excise duty, the local manufacturers enjoyed complete exemption from excise duty on computers in 2005-06 and further enjoyed protection against imports as imported computers were subjected to additional customs duty (levied in lieu of excise duty) equivalent to 7 per cent levied under Computer (Additional Duty) Rules, 2004. In 2006-07, this levy was withdrawn and the excise duty also got hiked to 12 per cent, presumably to enable the local manufacturers get the benefit of Cenvat credit and achieve cost optimisation.

On the VAT front, computers have always enjoyed a concessional rate of 4 per cent, in the light of the importance attached to the IT sector in India in its initial stages of growth. Further, some States have notified concessional rate of Central Sales Tax (CST) for inter-State sales of computers (and other IT products) manufactured in the State.

What other taxes does a computer manufacturer suffer in India?

The key indirect taxes applicable on manufacture/distribution of computers have already been highlighted above. On the input side, while there is no blanket exemption for computer manufacturers, various components/inputs required for assembly/manufacture of computers are currently exempt from customs/excise duty. For instance, most of the inputs do not attract basic customs duty (which is generally applicable at the rate of 10 per cent on most products, and is not available as credit).

Similar exemptions exist for various inputs/input services under excise and service tax laws. However, even in the absence of such exemptions, the manufactures could have generally claimed credit of such excise duty/service tax against their output excise duty liability. Therefore, excise duty and service tax would generally not add to the cost of manufacturing computers except in few cases (for instance, if the computer manufacturer is located in an excise-free zone such as Uttaranchal or Himachal Pradesh, where no Cenvat credit is available).

What's the tax impact on an assembler vis-à-vis a manufacturer. Are laptops treated differently for the purpose?

Under the indirect tax laws, generally no distinction is made between assembly and manufacturing of computers. Laptops do not enjoy separate treatment vis-à-vis computers and are subjected to same rate of taxes and duties.

Rationale for CVD on computers?

CVD is levied on imported goods in lieu of excise duty levied on similar goods manufactured in India. Thus, the rate of CVD is linked to the rate of excise duty applicable on the goods in consideration. Till such time the domestic manufacture of computers was exempt from excise duty, the manufacturers could not claim credit of duties paid on their inputs and, hence, such duty became a cost to them. With the levy of excise duty on computers, the manufactures can now claim credit of duty paid on their inputs, hence ensuring a smooth flow of credit.

The additional duty of customs of 4 per cent was levied on similar grounds to provided a level playing-field to domestic manufacturers and importers, as the former is required to pay VAT (generally 4 per cent) whereas the latter is not.

What tax changes can give a boost to the computer hardware industry and also benefit consumers?

Perhaps the most important change that is required at this stage is the transition to the Goods and Services Tax (GST) regime, which is slated to take place in 2010. GST would ensure a simpler and more transparent tax regime, and address issues concerning cascading of taxes, multiple compliances, etc. The phasing out of CST as a precursor to GST (which has already commenced) should also give a boost to the industry and benefit customers since it could cut down the costs of sourcing and distribution significantly.

On the Budget 2007 proposals that can have an impact on computer hardware.

The Finance Bill, 2007 has proposed to include computers, including laptops, under the MRP regime of excise. As excise duty for such goods is computed on MRP less a specified percentage of abatement (yet to be prescribed), it will be interesting to know the quantum of abatement the Government would grant on computers and the impact it will have on the market.

http://Detaxification.blogspot.com

D. Murali

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