Companies will now be able to bring foreign highly skilled engineers, tech experts and support teams, including from China, for short terms without worrying about tax complications in what will particularly benefit electronics manufacturers. This, after the budget proposed the introduction of a presumptive taxation regime, whereby only 25% of the remuneration received by such foreigners while in India will be liable for tax.
As India builds an ecosystem around electronics manufacturing, these companies need thousands of foreign experts to set up and maintain factories and to train local employees. Earlier, there was no clarity on taxation of such experts, who had to file tax returns if they stayed here for more than 90 days. Many were unwilling to come to India due to the compliance issues and the high rate of tax here, said industry executives.
The proposal announced in finance minister Nirmala Sitharaman’s latest budget will now change things for the highly skilled people and the companies that require their service, they said.
Along with presumptive taxation, the finance minister also announced a roadmap that will help Indian industry and global value chains (GVCs) to operate over the next decade with a predictable safe harbour regime. Akin to a long-term advance pricing agreement, this will facilitate global component and sub-assembly vendors to store their components physically in India, without the worry of an unpredictable tax incidence in future.
An industry executive said the proposals on the tax front are subtle, but far deeper and impactful. It assumes significance because the electronics industry in general and GVCs in particular widely believe that India’s tax regime is uncompetitive vis-à-vis competing manufacturing destinations like China and Vietnam, and remains a significant risk to investments due to lack of predictability.
An industry executive said the proposals on the tax front are subtle, but far deeper and impactful. It assumes significance because the electronics industry in general and GVCs in particular widely believe that India’s tax regime is uncompetitive vis-à-vis competing manufacturing destinations like China and Vietnam, and remains a significant risk to investments due to lack of predictability.
“This is a welcome move – first of many that we need to build long-term competitiveness and scale by shifting supply chains and enhancing opportunities for Indian industry,” said ICEA chairman Pankaj Mohindroo.
Apart from the taxation proposals, the government also announced scrapping of the 2.5% tariff on smartphone inputs such as PCBA, camera modules, connectors, wired headsets, microphones, receivers, USB cables, and fingerprint readers/scanners.
Imports of capital goods have also been made tax free for lithium-ion battery production – another sunrise space within electronics manufacturing. The finance ministry carefully calibrated these cuts against the potential of local manufacturing, after discussions with the Ministry of Electronics and IT and industry, to ensure that tariff cuts do not hurt domestic industry or jobs.
The electronics sector has shown rapid growth, especially after the introduction of the production-linked incentive scheme. The sector ended fiscal 2024 with revenue of over $118 billion, including smartphone production of $52 billion, electronics and smartphone exports of $29.1 billion and $15.6 billion, respectively.