Duty conundrum

It is not often that manufacturers ask for the return of a tax that has just been abolished. But this is what the Manufacturers’ Association of Information Technology (MAIT) has done.

It has asked the finance minister to restore the earlier 8 per cent excise duty on computers, something which the Budget had sought to reduce to zero.

MAIT’s logic, though, seems sensible on the face of it. Since the Budget retains the 16 per cent excise duty on computer components like hard disk drives and mother boards, MAIT’s view is that eliminating the 8 per cent excise on the final product alone is meaningless.

When the excise duty paid on components is higher than what is payable on the fully assembled product, the PC producer doesn’t have to pay any additional duties anyway due to the set-offs available.

Moreover, eliminating the duty on the final product, MAIT has argued, also results in the countervailing duty (CVD) on imports becoming zero, which makes imports cheaper. The price reductions on PCs and laptops announced recently by Dell and HP indicate that this may indeed be so. In the event, two alternatives have been suggested.

One, reduce the excise duty on all components to zero as well, or two, restore the 8 per cent excise on finished products. This will also ensure that, from next April, when the import duty on computers becomes zero, domestic producers will still continue to get some protection from the 8 per cent CVD (which is equal to the excise rate).

The problem, however, is a bit more serious than just fixing duty anomalies. The fact is despite so many years of protection, organised sector manufacturers in India haven’t really made too much headway in the market.Today, domestic manufacturers have a marketshare of just 20 per cent as compared to 23 for imports and 57 for the grey market. Since it is clear that the grey market has no real tax advantage over organised sector players (both pay 16 per cent excise/CVD on components that are mainly imported), this means the organised sector players are perceived to be either less efficient or are producing machines that have fewer features. Or their service levels may not be up to the mark.The arguments advanced by organised sector players are that volumes in India are too small to justify efficient production and high duty levels are no help either.

But the poor volumes argument seems a bit shaky when this year’s demand looks likely to be around four million PCs. If one player could get a fourth of this market, it would take volumes to fairly global-sized levels.

More important, if the ministry were to accept the abolish-excise-on-components argument of MAIT, they would be left with no defence. Come April 2005, computers would be importable at a zero rate of duty, and given that domestic manufacturers have a very small marketshare, it is difficult to see how they would survive.

Given this backdrop, it’s high time they began figuring out just where their competitive advantage lies, and whether they need to be in different areas like, for instance, designing of chips and other PC hardware architecture — like some top organised sector firms are already doing. A strategic rethink is in order.