Industry body representing IT hardware companies, MAIT, has asked the Centre to incentivise local manufacturing by refunding the GST on the value addition done by the companies.

“The refund could be proportionately increased if more value is added locally. This will motivate the manufacturers to make more investments locally for building a component ecosystem in the country,” MAIT said in a letter to the Finance Minister.

Under the existing tax structure, there is a 10 per cent cost arbitrage in favour of making phones in India compared to imports. However, this gap will reduce to zero under the proposed GST regime from July 1. In order to keep imports expensive, the Centre is looking to impose a 10 per cent customs duty on smartphones.

This could, however, draw the ire of the WTO as India is signatory to the Information Technology Agreement that prohibits customs duty on certain items on its list.

“It is not possible to prevent imports at “zero duty” from FTA nations as supplies may be imported /routed from countries with which India has signed Free Trade Agreements from countries such as Thailand, Vietnam and Malaysia.

“In view of these facts, India cannot impose customs duty on import of these products from any of these countries without incurring serious legal challenge or retaliatory actions from those countries,” MAIT said.

The industry body said that most viable and implementable option seems to be the option where in GST Refund can be linked to value addition.

“This incentive structure will help increase more investments in India and will increase the efficacy of other schemes like MSIPS, which as of date is not used fully. Our point of view has always been that operational expenditure based subsidy as production subsidy linked to Value addition is more viable than capital expenditure based subsidy. Here in case GST refund to the extent of value addition will surely incentivise manufacturing and put this entire perspective in place,” MAIT said.

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