ISA's pre-budget recommendations

BANGALORE, INDIA: The India Semiconductor Association (ISA), the apex trade body representing the Indian semiconductor industry, has submitted valuable budget recommendations to the Government of India (GOI) and has requested to favorably consider the memorandum, which ISA believes will greatly enhance the competitiveness of the domestic semiconductor industry.

The ISA has been making concerted efforts to boost the electronics system design and manufacturing ecosystem (ESDM) in India and recognizes the need for reforms to empower the domestic electronics system, design and manufacturing sector.

The budget recommendations have been framed keeping in mind core areas of:
1. Semiconductor design: VLSI design, embedded software and reference board design.
2. High-tech manufacturing - Amendments to the Semiconductor Policy 2007.
3. Promotion of domestic electronics manufacturing.
4. Tax and duty structure.
5. Encouraging pre-competitive research.

Some key features are captured here.

A. Semiconductor design: VLSI design, embedded software and reference board design
* Initiatives need to be undertaken to promote innovation in R&D and product design. Creation of local IP should be encouraged.

* National projects (national knowledge network, rural broadband and others) should be executed using Indian products.

* The Government should encourage incubating Indian start-ups. The government may set up a focused venture fund of about $50 million to provide seed and start-up capital for the new ventures to undertake R&D and product development.

* Extension of fiscal benefits under the STPI scheme till the year 2015 as a large number of companies have been unable to avail of the Special Economic Zones (SEZ) scheme due to a variety of factors beyond their control, including location issues.

* Extension of direct service tax exemption to STP and EOU Units akin to SEZ units. Presently, as outlined above, requiring STP units to avail of the same exemption through the refund route is not logical and cumbersome.

* Expedite the publication of the draft safe harbour rules and framework for advance pricing agreement so that all relevant stakeholders may provide their inputs to the GOI.

B. High-tech manufacturing - Amendments to the Semiconductor Policy 2007
* The global economic slowdown has severely impacted the semiconductor industry leading to piling up of inventories and reduced capital expenditure. It is, therefore, proposed that the deadline of March 2010 may be extended till March 2015.

Lowering of threshold limit for ATMPs and other eco-system units
* It is suggested that the threshold limit for certain categories of ecosystem units such as ATMPs, optical LEDs, storage devices, LCDs, FPD, photovoltaics, fuel cells, micro and nano technology products (as defined in the SIPS (Special Incentive Package Scheme) needs to be lowered to attract investments in the sector.

C. Recommendations to promote domestic electronics manufacturing

Preference for “Indian Products”
* It is recommended that a clause be added in all the purchases by the Central Government, State Governments, PSUs as well as the purchases done by the other organizations (NGOs and Corporates), where the Government funds are being used should have preference for “Indian Products” by reserving minimum of 30 percent purchases for “Indian Products” that meet the technical specifications and quality standards, so as to ensure that this recommendation does not affect the end-user prices. The “Indian Product” supplier would be required to meet the L-1 price from the open tender. For private telecom operators, their license condition must also require them to buy 30 percent of their total capital expenditure in the form of “Indian Products”.

* In case, there is no “Indian Product” for a certain application, the 30 percent requirement must be met through products that are “assembled” in India.

Increased tax concessions on R&D
* The tax deduction for R&D companies (who are DSIR registered) should follow a graded scale, based on the percentage of their revenues that they spend on R&D. A higher percentage means that the complexity of the product R&D is higher and hence it is expected to have higher value-addition and also a longer gestation period. The following structure for increased tax deduction is proposed:* For R&D spend in between 5-10 percent, for every extra percentage in R&D spend, the tax deduction should increase linearly by 30 percent.

* As a special stimulus to encourage Indian Product companies, they should be exempt from MAT for a period of five years, so that they can be use the extra cash generated from tax savings to reinvest in R&D and hence increased their global competitiveness. Without this exemption, the benefit of R&D tax deductions is marginal. Since there are not too many Indian product companies currently, the actual loss to the exchequer will be minimal, while the existence of this tax concession is expected to encourage creation of many Indian products.

D. Tax and Duty Structure
* Continuation of excise duty/CVD rates announced in the Fiscal Incentive package at 8 percent on all electronic products -– computers, peripherals and components.

* The 4 percent SAD – Special Additional Duty, should be abolished on all electronic products and components.

E. Recommendations to encourage pre-competitive research
* Offer R&D grants to companies that generate product revenues from the country and have substantial local value addition done from within the country.

* Offer tax rebates for patent filing expenses to encourage companies to innovate and gain competitive edge in their respective areas of business.

* Set aside a fund of Rs 100 crores to provide multiplier grants for collaborative research programs between industry and academia in the areas related to semiconductors and electronics.

* Facilitate setting up of ‘Center for Research in Embedded Systems and Semiconductor Technology’ (CREST).