Capital goods: Retain customs duty on metals

As domestic metal prices will rise faster than global prices if customs duty on metals is hiked, the capital goods sector seeks retaining them at current levels.

Indian capital goods industry that ride high on the economic surge of the country and strong investment splurge in both infrastructure as well as manufacturing sector has off-late seen slowdown in fresh orders especially manufacturing sector aftermath of economic slowdown.

Industry players though sits pretty with strong order book, there are signs of projects putting on hold by the developer/client affecting the capital goods industry. While the manufacturing sector was more impacted by economic slowdown and credit crunch there has been inordinate delay in finalisation of contracts/ projects by NHAI, PowerGrid etc in the infrastructure sector.

But with government of India stressing infrastructure development as panacea for economic slowdown there will be greater push for accelerated development of infrastructure auguring well for the capital goods industry that caters to infrastructure segment such as Power, mining, roads and urban infrastructures.

Indian capital goods sector comprising of mix of multinationals, Indian corporate in public and private sector and large number of small and medium enterprises continue to be burdened with inverted duty structure and tax anomalies. Even though customs duty on capital goods (under chapter 84, 85, 90) was reduced to 7.5% from 12.5% and the on Jan 22, '07 along with reduction in customs duty on basic inputs such as alloy steel, non ferrous metals and ball bearings used for manufacture of many capital goods, there are certain other capital goods where major inputs still attract higher customs duty than finished products.

For instance the customs duty on seamless tubes of alloy/non-alloy steels that find usage in boilers and heat exchangers is 10% the customs duty on boilers and heat exchangers is lower than 10%.  This leaves the domestic capital goods industry in a position of competitive disadvantage.

Similarly some types of projects and other capital goods were exempted from 4% CVD imposed to compensate for local sales level taxes while the domestic players who supplies to such projects were not exempted from VAT/ central sales taxes.

According to IEEMA the domestic players are at a competitive disadvantage of 12.57% to 24.54% compared to imports as far as zero duty projects.  To maintain competitiveness of the Indian industry IEEMA advocates, the Central Government in co-ordination with the state Governments rationalize/evolve policies helping reduce the number of taxes, simplify procedures, reduce transaction cost, financing cost, etc. Alternately, these taxes should be made VATable.

Capital goods sector is the only engineering sector where basic customs duty is 0%, 5% and 7.5%. While the domestic manufacturers have the deemed export benefits in case of capital goods under 0% customs duty category, that is not available for other two preferential category.

Further though domestic manufacturers are allowed to import their inputs at the same customs duty rate as the finished capital goods there are certain items that could not be imported at the equalized customs duty leaving the domestic industry under disadvantage.

Industry expectations

Extend the 15% price preference for the domestic industry to all International competitive bidding (ICB) projects.

Merit rate of excise Duty of 8% should be imposed on all products supplied to Power Generation, Transmission & Distribution projects till the time a uniform GST is implemented.

Customs duty on Steel and other related products should be kept at the current level so as to keep the electrical industry competitive.

Deemed Exports should be treated at par with Physical exports thereby creating a level playing field with regard to the payment of terminal Excise Duty and other benefits available to physical exports. Other Bilateral funding agencies like JBIC, IFAD, OPEC Fund & SIDA etc. should also be specified under the Privileges and Immunities Act and the projects under such funding should be covered under Notification No. 108/95 to claim exemption from payment of Excise Duty.

Encouragement and policy measured should be framed for setting up of indigenous CRGO capacity to meet the huge demand for transformer capacity.

Insulator - While the customs duty on insulator was 7.5% the duty on its raw materials MCI Caps, Epoxy Resin, Epoxy, Hardener, Blue Stain and Filter Cloth and LPG/LNG were higher at 10%. Thus the customs duty on raw material except LPG/LNG should be reduced to 5% and that of LPG/LNG should be reduced to zero percent.

Electrical cables - While the customs duty on electrical cables was 7.5% that of its raw materials i.e. Cable impregnating compound, petroleum jelly, hot melt glue, polychloroprene rubber (PCP), nitrile rubber, EPR/EPDM Rubber, Synthetic rubber (CSP), Nolco Flex S, electrical grade cable insulating paper, SC Carbon black paper, Non-woven polyester taps, glass mica tape, All Aluminum conductor (AAC), All conductor steel reinforced (ACSR), Lead Alloy (wrought), solder wire, optical fibre  were 10%. Thus custom duty on aforesaid raw materials of electrical cables should be brought down to 5% from current 10%.

To encouraging R&D on electrical equipment, a weighted deduction of 150% of expenditure for R&D or more income tax benefit on deductible expenditure should be given as available to Pharma, Bio-tech etc. Moreover price preference / support to be given for indigenously designed and patented products.

While improvement in infrastructure facilities should be on top priority, the new scheme replacing DEPB should be devised not only to take care of the actual cost of customs duty but also the additional cost of comparatively poor infrastructure and the higher transaction cost as mentioned above.

The Government has by and large exempted all activities carried out in rural areas as industrial or for infrastructure development in any form from the purview of taxation to encourage such activities. Similarly the Government should also extend these tax benefits as envisaged for other rural area development to RGGVY. This will result in bringing down the cost of the scheme by 25%.

Power sector service providers such as turnkey operators, O&M Service providers etc to be included for benefits U/s 80IA of Income tax and U/s 65 of finance Act 1994 for services tax.

The Govt. has been giving fiscal incentives to Mega and Ultra-mega Power projects. IEEMA seeks similar benefits be extended to other Power sector projects, including the Transmission & Distribution (T&D) Projects.

Reduce customs duty from 10% to 7.5% on seamless tubes & pipes of non-alloy/alloy steel, castings & forgings of iron and steel and tubes / pipes & hoses of vulcanized rubber used in the manufacture of capital goods.

Impose 4% special CVD on all types of projects and others which involve import of capital goods by removal of exemption to counter balance internal taxes such as CST/VAT.

Import of capital goods under 0% category for project imports and others should be removed.

Analyst expectations

The government though is not likely to impose customs duty on project imports that currently attracts 0% customs duty as wished by the industry as the country needs accelerated development of power generation capacity. However there is all likely for greater allocation for projects such as APDRP, Rural Electrification (RGGVY), TUF etc auguring well for the industry.

Stock to watch

BHEL, Crompton Greaves

Summary

Policy and regulatory frameworks is all likely to encourage greater investment flow into power sector and other infrastructure sector so as to give a push to the economy.  Strong infrastructure focus will continue to drive the demand for capital goods. Over all the Union Budget 2008-09 is all likely to be positive for capital goods industry even the project import continues to attract lower import duty and favourable treatment.