After the recent policy announcements, it is very important that the Indian
manufacturers once again bring up the bias against domestic manufacturing. The
anomalies in excise, customs and sales tax are adversely affecting Indian
manufacturers. The net impact of these announcements can be devastating and can
lead to very high preference for importing telecom equipment rather than
manufacturing it locally. And secondly, it will lead to Indian manufacturers
further getting into contract manufacturing from locations like China.
Excise Anomaly
Goods manufactured in India bear the burden of paying taxes and excise
duties on the end-customer realizable value. That includes distribution costs,
manufacturers profits and value addition in the form of services rendered for
installation, commissioning of the systems. Imported goods on the other hand
attract Customs duty and countervailing duty (CVD) on import price which does
not include local distribution costs, maintenance costs for warranty period,
customer training costs, local profits and local-value addition in the form of
local services rendered for installation, commissioning of the systems. In the
case of high technology equipments the import price of hardware is generally
half of the end customer price because of local installation, commissioning,
programming, maintenance and training of customer.
These problems are more alarming in products with high content of
intellectual property (IP) or high amount of local-value addition and goes
against the overall objective of promoting Indian IP and local value addition.
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To make matters worse the percentage of sales tax charged on local produce is
much higher than the sales tax equivalent charged on imported material in the
form of special additional duty (SADD), which is now zero for IT products.
Further the sales tax on Indian manufactured goods is also charged on end
customer realizable value, which has a cascading detrimental affect. These
handicaps need to be mitigated if Indian R&D and manufacturing efforts have
to be promoted.
This anomaly becomes even more glaring once we take into account the impact
on account of splitting the cost of imported material into software (Zero
Customs duty) and hardware. In the case of a manufacturer this break up on
imported material is meaningless because of Mod-vat implications.
Subcontracting to China
Present system of taxation makes it extremely attractive to shift
manufacturing of goods with high local value addition to countries with low job
work charges. In "IT" products that have large IP content the ratio of
cost of inputs to the end customer price could be as much as 1:4 as it involves
warranty costs, customer training costs & costs for customization &
programming for integrating with third party products like computer systems etc.
In such a situation if one was to get the product manufactured from China the
duties levied would be around 35 percent (Customs 15 percent, CVD 16 percent
& SADD 0 percent) on 120 Percent of the raw material costs (Assuming that
conversion cost or job work cost would be 20 percent of BOM which is on the
higher side even in the Indian conditions) i.e all duties & taxes levied
would be around 43 percent of the BOM.
On the other hand if finished goods are produced in India then 28 percent
duties (16 percent Excise & 12 percent Sales tax) are paid on end customer
realizable value i.e., 28 percent on 400 percent of the bill of material (BOM).
This would work out to 112 percent of BOM. It thus becomes unattractive to
manufacture in India, goods that have high local-value addition. We continue to
manufacture because our volumes are not large enough to justify contract
manufacturing in an overseas country.
Solutions
The solutions to these are not very difficult. Add about 30 percent to the
imported price and customs duty as local-value addition before levying CVD and
SADD–a practice followed in countries like Sri Lanka. Abatement on the
end-customer price for excise and sales tax, with a minimum value addition norm
should also be provided.
Rajesh Tuli, heads an EPABX company
Excise and Sales Tax Anomalies Increase Costs
The government regulations on excise and customs adversely discriminate
against locally produced goods. For example, locally-produced goods bear the
burden of paying taxes and excise duties on the end-customer price while
imported goods attract taxes and levies on import price, which is generally half
of the end customer price. Further, the sales tax charged on local produce is
much higher than the sales tax equivalent charged on imported material in the
form of SADD.
If an EPABX project is to be installed in India at the end customer price of
Rs 100 and the Indian company was to keep a gross margin of Rs 20 then let us
look at the taxes paid in both the cases. In case of a turnkey project, there
would be costs like installation, warranty, freight, software integration,
packaging and some civil works, which are locally arranged by both the importer
and the Indian manufacturer and they would be worth Rs 20. Total duties paid to
the government for imported goods is Rs 15.71. (Customs duty of Rs 6.56, CVD of
Rs 7.55, zero SADD and Rs 1.60 service tax.
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In the case of indigenous product total duties paid after accounting for
benefit of modvat is Rs 26.03 consisting of Rs 12.31 of Excise after modvat
benefits and Rs 10.72 Sales Tax and Rs 3.00 of basics customs duty and Rs 3.68
of CVD on imports and Rs 0 of SADD on imported raw material sales tax. This
clearly shows that domestic manufacturer stands to loose at the rate of at least
10.32 percent in comparison to imported good. This is because imported goods pay
excise component on the purchase price, which is about 50 percent of end sale
value and sales tax levied is at the rate of 0 percent against local sales tax
of 12 percent.
Indian manufactured goods have to pay excise on end-realizable value from the
customer, which includes freight, packaging, local warranty support costs and
profits of the entrepreneur. On all these components including excise one has to
pay sales tax at the rate of 12 percent. This anomaly becomes even more glaring
once we take into account the impact on account of splitting the cost of
imported material into software (zero customs duty) and hardware. In the case of
a manufacturer this break up is meaningless, because of Modvat implications.