BUDGET RECOMMENDATIONS TO THE MINISTRY OF … · BUDGET RECOMMENDATIONS TO THE MINISTRY OF FINANCE ... Challenges faced by Appliances and Consumer Electronics ... • For imported

BUDGET RECOMMENDATIONS TO THE

MINISTRY OF FINANCE

CONSUMER ELECTRONICS AND APPLIANCES MANUFACTURERS ASSOCIATION

MINISTRY OF FINANCE

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OCTOBER 13, 2016

Introduction

• Consumer Electronics and Appliances Manufacturers Association (CEAMA)

• An all India organization in the Consumer Electronics and Durables sector, looking after the common

interest of the members, for sustainable growth and profitability

• It has been in existence for over 35 years and has more than100 members comprising of national and

multinational companies and includes large, medium and small-scale sectors

• The Consumer Durables sector plays an important role in the economy of the nation

• Contributes >5.5% to the IIP

• It is an employment intensive sector - for every 1 direct job in this space, ~ 3 indirect jobs are created

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• It is an employment intensive sector - for every 1 direct job in this space, ~ 3 indirect jobs are created

• This sector has been the engine of economic growth for Japan post-WWII, South Korea, China and SE Asia

have benefitted equally in later decades

• Considering the low level of penetration of Consumer Durables, this sector has immense growth potential

and job creating opportunities

FY 2017-18 BUDGET

RECOMMENDATIONSISSUES and RECOMMENDATIONS

INDIRECT TAX

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Encourage ‘Make in India’ for ACE goods (1/2)

Challenges faced by Appliances and Consumer Electronics (ACE) industry

• The Indian ACE market accounts for more that 40 percent of end consumer spending in India. However, the

growth in domestic manufacturing of this industry has been slow

• Indian manufactures face numerous challenges like lack of component ecosystem, high cost of finance,

infrastructural concerns like high freight and logistics cost, high tax incidence, etc

• As a result, most of the ACE goods including their components are imported from China and other South East

Asian markets, because of competitive pricing on account of the following reasons:

• These nations have considerable supply base and installed capacities illustrated below by way of total

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• These nations have considerable supply base and installed capacities illustrated below by way of total

manufacturing base in terms of total quantity of production of some key ACE goods

• The Government of China provides numerous subsidies for development of manufacturing units (for

example export subsidy of 4-8% of FOB price for value addition ranging from 25-50%)

• The rate of interest and cost of finance is lower in Asian countries as compared to India (12-14% in India

as compared to 5-7% global average)

• China has huge and cost effective labor pool, developed supply ecosystem leading to economies of scale

• All these factors tend to encourage import of end products in India vis-à-vis domestic manufacturing

Manufacture of ACE goods India ChinaTelevision 13 million 90 millionWashing Machine 7 million 50 millionAir Conditioner 3 million 40 million

Issue Recommendation

The current Basic Customs Duty (BCD) on various ACE

goods illustrated below is 10 percent

(a) Microwave Ovens

(b) Air Conditioners

(c) Washing Machines

(d) Refrigerators

(e) LCD/LED TVs

We recommend that BCD rate on ACE goods is

increased from the current rate of 10% to 20% so that

import of these goods is discouraged.

This would encourage domestic manufacturing of these

goods in India.

Further, we recommend that the BCD rates of

components of these ACE goods which is presently in

the range of 7.5-10% should be continued as such and

Encourage ‘Make in India’ for ACE goods (2/2)

(e) LCD/LED TVs

Further, these goods enjoy concessional rate of BCD

under various FTAs.

The above makes the import of these finished goods

easier and cheaper as compared to local manufacturing

of the same in India.

This has further resulted in erosion of the component

supply base in India, since there was not enough

domestic demand to be catered to by the component

manufacturers and they could not reach economies of

scale.

the range of 7.5-10% should be continued as such and

should not be reduced any further. This is to ensure

that domestic manufacturing of components is also

encouraged which will lead to a development of full

scale supply ecosystem for ACE goods in India.

Similar measures have been taken by the Government

for the Indian automotive industry (refer Annexure for

details), which has transformed the industry into a

global manufacturing hub.

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Encourage ‘Make in India’ for Mobile Handsets (1/3)

Steps taken by the Government of India to promote manufacture of mobile handsets in India

• The Government of India established the differential duty dispensation on mobile handsets in the year 2015

and 2016 by imposing 12.5% CVD vs 1% excise duty on mobile phones and 12.5% CVD vs 2% excise duty

(without Cenvat Credit) on specialized accessories of mobile handsets viz Charger/ Adaptor, battery and

wired headsets

• This has been coupled with zero customs and excise duty on parts used in manufacture of mobile phones and

the specialized accessories

• This has provided the necessary thrust for boosting mobile handsets industry in India, and has thus, resulted

in increased investments for setting-up manufacturing facilities in India. The number of mobile phones

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in increased investments for setting-up manufacturing facilities in India. The number of mobile phones

manufactured in India has increased from 68 million in 2014 to 100 million currently. This has resulted from

34 new manufacturing units be set up in last one year along with 15 new component units

• The data highlighting the projections regarding growth of manufacturing activity in mobile handsets industry

in India by the end of 2019-2020 is provided below:

• 500 million units (value: INR 3 Lakhs Crores) estimated to be produced

• Export of 120 million units estimated

• Component industry with a turnover of over INR 50,000 crores estimated to be set

• Additional employment for 15 lakh people estimated to be generated


The current duty differential provided for mobile

handsets has resulted in increased investments for

setting-up manufacturing facilities in India.

Under GST, there is no specific clarity regarding GST

rates on mobile handsets. Standard rate of GST could

be within the range of 18%.

If standard rate is applicable on mobile handsets,

increase in tax incidence would be very high.

It is recommended that ‘Make in India’ initiative be

patronized under the GST regime as well in the

following manner:

• For imported mobile handsets: Introduce a negative

list of goods for import and trading on which no

credit of CGST would be permissible, thereby

encouraging indigenous manufacturing. Mobile

handsets should be included in such negative list


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increase in tax incidence would be very high.

Further, there would be no incentive for manufacturing

vis-à-vis import and trading as present tax arbitrage

would go away. This would abruptly halt the

investments made in this sector.

• For domestically manufactured mobile handsets:

CGST at 0% should be applicable without input tax

credit. Further, SGST at 5% should be applicable at

each stage which is equal to present VAT rate

applicable in many States. This SGST should be

creditable as under the present regime


• For inputs, parts, components and accessories of

mobile handsets:

(i) Non-ITA inputs - Impose appropriate BCD, import

CGST at 0%, Domestic manufacturing CGST at 0%

and both Import and Domestic SGST at 5%

(ii) ITA inputs – Following rates depending on whether

they have come under Phased Manufacturing duty

differential program (‘PMP) or not as follows:


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differential program (‘PMP) or not as follows:

The same GST ecosystem as recommended above

should be extended to inputs, parts, components and

accessories for the after-market services which is a very

small market compared to the final mobile phone

manufacturing

Inputs under PMP Inputs not under PMP

IGST on imports 12.5% + 5% 0% + 5%Domestic CGST 2% 0%Domestic SGST 5% 5% Domestic IGST 2% + 5% 0% + 5%


Presently, manufacturing units in Excise Free Zones are

not required to pay output excise duty on clearance of

finished products.

Under the GST regime, it is expected that the incentives

given to such zones will be preserved under ‘pay and

refund’ scheme, wherein the units will be required to

pay upfront GST on finished goods, and thereafter claim

refund of such taxes.

We welcome this recommendation and wish to suggest

that gross CGST paid by units in Excise Free Zones

should be granted as refund.

Further, non-tax related subsidies could be extended to

such units to keep the competitive advantage going.

Benefits to Excise Free Zones

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Presently, there is a cumbersome procedure

to fulfill actual user condition for claiming

BCD exemption on import of Back Light Unit

Module (BLU) and open cell, used for

manufacture of LCD/ LED panels.

Every import shipment needs approval of the

local Excise office.

This significantly increases the transaction

Considering that actual user condition is required to be fulfilled on

duty free import of LCD/ LED panels, the BCD exemption provided

on BLU and its parts and open cell should be unconditional, ie,

without actual user condition to encourage manufacturer of BLU

panels in India.

The major parts which are required for manufacturing of LCD/LED

panels are listed below

Encourage manufacture of LED/ LCD Panels

Description HSN CODEThis significantly increases the transaction

cost and thus, impacts Medium and Small

size players.

Actual user condition is also required to be

fulfilled on duty free import of LCD/ LED

panels.

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Open Cell (15.6” and above) 85299090

Plate Diffuser 85299090

Film Diffuser 85299090

Reflector Sheet 85299090

Film, Top 85299090

Film, Middle 85299090

BAR, LED 85299090

Cushion / Gasket 40169990

Bezzal 85299090

Back Cover Sheet 85299090

Back Light Unit Module 85299090

Film, Bottom 85299090


Presently, there is no incentive from the

Government in respect of high EER products.

Higher Star Rating saves more energy, but

also costs more – results in low consumer

demand.

It is suggested that an incentive scheme be introduced to

encourage manufacturers which produce high EER products.

This could involve providing (i) BCD exemption on parts for

manufacture of products with high EER; (ii) Merit output rate on

finished products based on their EER.

This would not only stimulate consumer demands but also

incentivize customers to replace products like old inefficient room

ACs by new units.

Encourage high Energy Efficiency Rating (EER) products

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ACs by new units.

This would also result in significantly decreased power

consumption.


Presently, BCD exemption is available in respect

of capital equipment required for projects for:

(a) Substitution of Ozone Depleting Substances

(ODS)

(b) The setting up of new capacity with non-

ODS technology

BCD exemption should be rationalized and extended to

• Raw materials / components / consumables for production of

equipment / products based on non-ODS Low GWP technologies

• Equipment imported for setting up R&D / Testing and Calibration

facilities for development of non-ODS Low GWP products and

components

It will help set-off higher production cost of products (like air-

conditioners) with non- ODS technologies when compared to

Encourage non-ozone depleting substance with low global warming potential (GWP) technologies

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conditioners) with non- ODS technologies when compared to

R-22 (HCFC) technologies.

Extending exemption as above will encourage development

and adoption of GWP technologies in the Indian markets with

favorable environmental impact.


Warranty & AMC supplies:

Under GST, every supply (even without consideration)

is liable to GST. Hence, parts supplied to customers

under in-warranty or AMCs are likely to suffer GST.

This would lead to double taxation since value of

subsequent supplies would already be built into the

original sale price/ contract value, on which GST

Parts supplied under in-warranty contracts or AMCs

should be made zero-rated basis a self-declaration

from the supplier.

GST paid on parts meant for supply under warranty or

AMC should be eligible for input credit.

Transfer of credit to cross location should be allowed.

Other recommendations under GST

original sale price/ contract value, on which GST

would be paidTransfer of credit to cross location should be allowed.

Alternatively, refund of unutilized input credit should

be allowed.

All India services:

Under GST, there is a possibility that service provider

may be required to obtain registration and invoice on

State-wise basis and issue State wise billing to

recipient based on ‘place of supply’.

This would result into credit accumulation at different

locations for the service recipient and multiple tax

compliances for service provider.

Centralized billing and tax payment should be allowed

for pan-India contracts and place of supply should be

determined based on location of the contractual

recipient.

Further, ISD mechanism should be introduced for

transfer of credits on inputs and capital goods as well.

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Other recommendations

Clarity in scope of taxation:

a) Definition of ‘supply’ should be narrowed down to tax only few transactions without consideration such as

stock transfers – self supply of services should be deleted

b) Credit/ adjustment should be allowed of tax paid on original sale in case of sales return at any location

c) Current tax benefits to EOU/ STPI/ EHTP units should be continued to encourage exports

Simplicity in compliances:

Other recommendations under GST

a) Single IGST rate should apply for all inter-State supplies so that businesses are not constrained to apply

multiple rates

b) Centralized registration should be allowed for levies of the Central Government - CGST and IGST

c) There should be no requirement to mention HSN on invoices for small scale traders

Resolve difficulties around credit:

a) input tax credit accumulated at marketing offices be allowed to be transferred to head offices by way of

input credit distribution

b) Clarity should be provided for allowing all traders in the supply chain to avail credit of taxes on transit

stock. Alternate facility of claiming ‘presumptive GST credit’ can be allowed for ease of compliance

c) Recipient should be allowed credit irrespective of non-payment of tax by supplier

d) Credit should be available immediately on payment to supplier (including on advances) � 14

FY 2017-18 BUDGET

RECOMMENDATIONSISSUES and RECOMMENDATIONS

DIRECT TAX

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Recommendations

Rationalisation of basic exemption limits considering GST:

a) Considering the increase in cost of living, the current basic exemption limit of Rs 2.5 lakh should be raised

to Rs 3.5 lakh.

b) Also going forward increase in basic exemption limit could be linked to the rate of inflation and be raised

every year automatically.

c) Considering the anticipated inflationary pressure in the initial phase of GST, this amendment is highly

desirable to protect the lower middle class tax payers.

d) This will also facilitate wilful inclusion of individuals in tax net with the digital tracking and marching of

Direct Tax recommendations (1/5)

d) This will also facilitate wilful inclusion of individuals in tax net with the digital tracking and marching of

supply transaction under GST.

Rationalisation of limits under Section 80C:

a) The Section 80C limit of Rs 1.5 lakh hasn't been revised since FY 2014-15. It may see an increase this year.

Possibly, the government may look at adding some saving products and increasing the limit to Rs 2.5 lakh.

b) 80C deduction should be linked to the income level - higher income taxpayers should be given higher limit

for deduction i.e. a slab for tax deductions based on the income.

Rationalisation of limits for Medical and Education allowance:

a) Medical allowance of Rs 15,000 per annum, education allowance of Rs. 100 per month per child and hostel

allowance of Rs 300 per month per child are too low considering the actual costs involved and have not

been revised for a very long time. These limits should be revised based on revised benchmarking.

b) Rationalisation of these limits will motivate wilful compliance of taxation laws by individual tax payers.

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Recommendations

Weighted Deduction under Section 35 of the Act – Research & Development:

a) Section 35,35(2AA) and 35(2AB) of the Act provide for weighted deduction of expenditure incurred on

scientific research and development. In the finance act 2016 the deductions have been revised downwards

from 125% to 100%, 150% to 100%, 175% to 150%, 200% to 150% and 200% to 100% under various

provisions of the act u/s 35 going forward.

b) The old regime of weighted deduction shall be restored to give a greater acceleration to in-house R&D in

India.

c) Weighted deduction shall be extended to contract Research and Development in respect of work being

contracted outside of India by an approved in-house research and development centre in India in cases

where the IPR resides with the company in India.


where the IPR resides with the company in India.

Interest and penalties on account of retrospective amendments:

a) Deductors / payers should be completely exonerated from levy / recovery of tax, interest or penalty for

payment made in the past, on account of all retrospective amendments introduced by the Finance Act,

2012 in the context of definition of royalty.

b) Alternatively, amendment in section 40(a)(ia) (providing for no disallowance in case payee has filed return

of income and paid taxes etc.) should be made from a retrospective effect.

Section 40(a):

a) Rationalization of provisions related to deductibility of expenses (70%) under section 40(a)(ia) (provided

taxes have been duly deducted and deposited into the Government treasury by the payee) should be

expanded to cover payments made to non-residents.

b) Corresponding amendment in section 40(a)(i) [like 40(a)(ia)], that taxes shall be deemed to be paid where

non-resident payee files the return in India should be made. � 17

Recommendations

Section 32AC – Investment allowance for acquisition and installation of new plant and machinery:

a) For the purposes of section 32AC (which provides for investment allowance for investments in plant and

machinery, being qualifying “new asset”) any office appliances including computers or computer software

is not regarded as a qualifying new asset. It is well known that computers and computer software enhance

efficiencies and have a critical role in manufacturing process monitoring, execution and quality checks and

therefore, are indispensable in the current manufacturing environment.

b) It is suggested that computers and computer software should be regarded as “new asset” for the purposes

of Section 32AC


Allowability of Corporate Social Responsibility (‘CSR’) expenditure:

a) To encourage more CSR activities by the company outside the businesses to promote and develop

economy, CSR expenditure mandated by Companies Act, 2013 should be allowed as a deduction under

section 37 of the Act.

Deduction of employees contribution to provident fund [section 36(i)(va)]:

a) Under the provisions of Section 43B of the Act, deduction towards employer’s contribution to PF / any

other fund for the welfare of the employees is allowed if the same is deposited upto the date of filing of

the return of income. However, the said benefit is not available for the employee’s contribution to PF /ESI.

Therefore, suitable amendment to be made u/s 36(i)(va) of the Act so as to bring the provisions relating to

employee’s contribution towards employee welfare funds in line with the employer’s contribution towards

such fund.

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Recommendations

Section 201:

a) Time limit for seven years for passing an order under section 201 should also be made applicable in respect

of payments made to non-residents

Time Limit for disposing of appeal by CIT(A):

a) Since no time period has been specified for the Commissioner (Appeals) to dispose off the appeals filed by

taxpayers, there is a significant delay in disposal of appeals at the first appellate level resulting in deferment

of settlement of issues and on-going litigation for subsequent years. In view of the same, provisions


of settlement of issues and on-going litigation for subsequent years. In view of the same, provisions

requiring the Commissioner (Appeals) to dispose off the appeal in a time bound manner should be

introduced on lines similar to Dispute Resolution Panel (‘DRP’) provisions

Relief from deduction of tax at source should be provided on year-end provisions created by an assessee in

accordance with accounting policy, where neither the payee is identifiable nor any credit is made in the

name of such payee:

a) Though there are judicial precedents in favor of the above position but at present tax authorities disallow

entire year-end accruals, thereby raising frivolous demands, therefore clarity on the issue should be

provided in the Act itself

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Recommendations

Prior Period expense:

a) Presently prior period expenditure is not allowed in the financial year in which it is actually debited. Hence

the only option is to file revised return or litigate the matter with the appropriate appellate authority to

allow such expenditure in the year to which it relates. It causes not only undue hardship to the taxpayer

but also unnecessary paperwork for the department with no benefit to either party.

b) It is therefore suggested that such expenditure may be allowed in the year in which it is debited in the

books of accounts provided it is otherwise allowable. However, there can be time limit to allow the same

i.e., for a period of 8 years in line with provisions of Section 72 of the Income Tax Act.


i.e., for a period of 8 years in line with provisions of Section 72 of the Income Tax Act.

Deduction for employment of new employees under Section 80JJAA :

a) Section 80JJAA provides for 30% deduction against the salary cost of new employees provided inter-alia

that the employees are employed for more than 240 days during a previous year.

b) Employees in respect of whom the period of continuous employment of 240 days or more is attained in the

previous year succeeding the previous year in which the employee is employed, the deduction under

section 80JJAA of the Act should be granted from the succeeding previous year.

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FY 2017-18 BUDGET

RECOMMENDATIONS

ANNEXURE

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Proposal to hike BCD for ACE is in line with duty protection measures for Indian automotive industry transforming it into a global manufacturing hub

Categories Import duty (%)

Commercial vehicle CBUs 20% (raised in

Budget 2015 from

10% earlier)

Cars CBUs whose CIF value is:a) More than $40,000 b) Less than $40,000

100%60%

Duty protection measures for Indian automobile market have developed it into a global manufacturing and export hub:

� Increase in automobile exports by 1.9% led by PVs (5%) and CVs (17%) in year ending March, 2016 compared to last year

� Significant investments by global players like:

� Nissan – plans to develop hybrid vehicles

� GM – investment plan of $1 bnin India by 2020

� Mercedes Benz – double India assembly capacity to 20k units p.a.

Source: SIAM

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BUDGET RECOMMENDATIONS TO THE MINISTRY OF … · BUDGET RECOMMENDATIONS TO THE MINISTRY OF FINANCE ... Challenges faced by Appliances and Consumer Electronics ... • For imported