Only 2.9% of the Indian population pay income tax, so the Indian government has to rely on all kinds of indirect taxes to fund public services. However, officials are well aware of the impact and implication indirect taxes have on the efficiency of business operation. India's nationwide uniform tax rate going into effect in 2016 actually spurred economic growth. With the corporate tax rate reduced from 30% to 25%, the Indian market is enjoying widespread prosperity. The number of large-scale shopping malls is on the rise, which shows the vibrant growth Indian businesses are now experiencing in contrast to the past.
However, in the fiscal year commencing on April 1, 2018, the Indian government will be raising customs duty on imported electronics. The tariffs on mobile phones and smartwatches will increase from 15% to 20%; mobile phone components and accessories from 10% to 15%; LED/LCD/OLED displays from 7.5-10% to 15%; and perfume, furniture and other commodities from 15% to 20%. The Indian government's move to hike import duty is an attempt to force manufacturers to set up production bases in India.
According to a preliminary report by the Indian customs authority, low-cost TVs from China sold through online channels will have at least 10% higher costs after the hike in import duty from 15% to 20%. Adding other duties such as commodity tax, manufacturers could pay up to 51% taxes for TVs imported to and sold in India. As such, many China-based manufacturers selling their products under brand names such as Nacson and Wybor through online channels in India may declare prices much lower than the actual value to avoid paying high import duty. The Indian customs authority will strengthen the control on such practices.
The report also points out prices of imported TVs of well-known brands including Samsung and Sony will also have to increase by at least 5%. However, the gap between the top-tier brands and lesser ones will narrow. It is estimated the import duty on a mainstream 32-inch TV will be US$106, 39-inch TV US$147 and top-tier 65-inch curved-screen OLED TV US$417.
Conflicts between interest groups
Public organizations play interesting roles during the policy formation. In my meeting with Lava founder Hari Om Rai - who is also chairman of a non-government ICT organization and a major force driving the increase of import duty - he pointed out India has to trade short term profit for an opportunity to foster local manufacturing. Lava has assembled an R&D team comprising 700 members in China for the purpose of grasping market trends and planning a localized production system specifically for India. However, when asked if he intends to build his own supply chain in India, he replied that his focus would be on marketing. This shows the Indian industry still has concerns over building their own localized production ecosystem.
When talking about the local Indian handset ecosystem, Pankaj Mohindroo, president of Indian Cellular Association (ICA), said that from a long-term perspective, India has no reason not to establish its own handset industry and supply chain. Rajan Mathews, director general of Cellular Operators Association of India (COAI) , however, hopes the Indian government will postpone the auction of 5G spectrum until the global standards consolidate and then consider how India can react strategically.
COAI thinks broad 5G rollout will come in 2020 and this will hinge on how telecom operators can profit from their investment. The real problem in India is that telecom operators will have difficulty getting quick return-on-investment out of 5G services with the chaos and fierce price competition in the telecom market. Unlimited data plans cost as low as US$12 a year in India. Only by integrating telecom operations with services can the Indian telecom market engage in business models with reasonable profit margins.
To meet India's special needs, Taiwan and India can collaborate and establish a Taiwan product service center in Delhi to sell products on the one hand and to gain an insight into the Indian market needs while recruiting Indian talent on the other hand. The collaboration will go smoothly with better acquaintance between both parties. However, with the current "Made in India" initiative, the Indian government insists on providing only land and infrastructure but no additional support to meet the specific needs of Taiwan manufacturers. As they have enjoyed comprehensive support from the China government, Taiwan manufacturers naturally have little interest in India where it may take a long time for them to get a return on their investment.
As a matter of fact, India will begin to collect higher import duty on mobile phones and components starting in April this year but the country is not well prepared. There is not even a PCB manufacturing industry. The Indian government has responded positively only in regard to the recruitment of high-tech talent. Aside from this, many Indian provincial governments have also entered into MOUs with Taiwan's Hsinchu Science Park to establish industrial partnerships.
India Foundation consultant Jonathan Lulremruata, who helped Taiwan-based Foxconn and Lite-On build factories, disclosed he once represented the Indian government trying to convince leading Taiwan PCB manufacturers to invest in India but received no positive response as the manufacturers were deterred by market uncertainty in the country. The problem now is that India has needs but no one is brave enough to make a move.
India's announcement to replace the INR500 and INR1,000 banknotes at the end of 2016 came as a shock to the world. It is reported that only five officials of the Modi administration were involved in the decision-making and cell phones were banned from cabinet meetings to ensure confidentiality.
When rupee notes with an 86% circulation in India were being replaced, people were trying all kinds of bizarre ways to exchange their money. Some gave cash to their upstream suppliers as an advance payment for orders in the future. Some companies pre-paid employees their annual salary. Otherwise there would be taxes imposed on capital whose flows could not be accounted for. It is not clear what the Indian government has benefited from the change but it is believed 99% of hidden capital has surfaced. Whether the Indian tax system has improved as a result of the rupee note change remains uncertain. However, statistics have shown the change has had a negative impact on short-term economic growth. Nevertheless, the Indian people optimistically believe this is essential to financial reforms for India and expect GDP growth to hike from 6.43% in 2017 to 7.5% or higher.
Only 2.9% of the Indian population pay income tax. People making less than INR40,000 (about US$613.2) a year are exempt from paying income tax. Tax evasion is not uncommon in India. For example, for a house traded at INR10 million, the seller and buyer may strike a deal to have half the amount paid in cash under the table, so they are taxed only for the declared half. The government institutes all kinds of sophisticated measures in an attempt to crack down on tax cheats and claw more taxes. But taxation in India is a complicated matter. For instance, different provinces have different tax laws and this makes it impossible to calculate the costs when trading across provincial borders. As such, the country with such a large population is unable to offer the benefit of a single market.
The Modi administration introduced nationwide uniform tax code, trying to usher India into a new era. However, the interest groups behind public organizations and the failure of government agencies and think tanks to remaon impartial, form the hidden costs of India's reform. For example, telecom operator associations wish for lower costs of imported handsets and components. This is contrary to the policy to foster a local supply chain that handset makers actively support. But the handset makers know little about the workings and capital operations of the industry chain. Members of Manufacturers' Association for Information Technology (MAIT) are mostly distributors of computer equipment, not makers of IT products, and they have varying concerns. These are all problems that India has to overcome when addressing public issues.
The Modi administration boasts "minimum government, maximum governance" and tries to minimize government intervention except for critical policies. The KPMG report repeatedly emphasizes that the Indian government now leverages e-government technologies to keep track of corporate tax filings, which also brings transparency to administrative procedures.
Taiwan's ambassador in India, Kwang-Chung Tien, said the Modi administration requires a decision be made within three levels of hierarchy without going through layers on layers of bureaucracy. According to Modi, officials may make a wrong decision but it is much better than not making a decision at all.
The India government may not have made well-thought-out decisions in its policy-making. For instance, it would take seven months to print new rupee notes even if printing facilities maintain 24-hour operation. What's amazing is that no matter how senseless the government's decision may be, the Indian people will stick it out. They have never organized a protest against the government's economic policy.
Modi may have offended people with vested interest in the process of reform. Although Modi may still be able to win the next election, his party could lose the majority in the congress, said Tien.
Modi does not seem to be looking for personal gain. It is said he sleeps only four hours a day, spends one hour doing yoga and works in the office for the rest of the day. Modi's prime minister office (PMO) is considered the most powerful institution in India.
After he took office, Modi set India's foreign policy, "Act East," and looks to establish closer partnerships with the US and Japan in an attempt to counter China's growing expansion. India has also entered into a range of collaboration agreements to bring useful technologies to the country. For example, its collaboration program with Japan is said to include high-tech talent incubation. India can certainly rely on locally trained engineers and technicians for fundamental technological developments. However, with an overemphasis on science and technology, India still looks like a novice in the world of business despite strong achievements in military defense and satellite advancements.
(This is the third installment of an article about India's IT market and industry written by Colley Hwang, president of Digitimes.)
Increase of tariffs on electronics imported to India
Before Apr 1, 2018
After Apr 1, 2018
Mobile phone components
LCD/LED/OLED displays for TV
Data source: KPMG, compiled by Digitimes
Pankaj Mohindroo, president of Indian Cellular Association (ICA)
Photo: Colley Hwang, Digitimes, February 2018