April 19, 2017 2:00 pm JST

Apple's India tax break request declined, for now

Officials suggest final decision to be taken by GST council

KIRAN SHARMA, Nikkei staff writer

NEW DELHI -- Apple's demand for tax concessions for local iPhone production has "not been accepted" by India's Finance Ministry and the matter may now be decided by a council responsible for the implementation of the country's new indirect taxation regime.

A goods and services tax subsuming over a dozen central and state government levies is expected to be implemented from July 1. Under the GST regime, all imports will be liable to the new unified sales tax and "any tax exemptions ... can be granted based on the recommendations of the GST council only," P.P. Chaudhary, junior minister for electronics and information technology, informed Parliament.

The minister's remarks suggest that the ball is now in the court of the GST Council -- which comprises representatives from the country's central and state governments -- for any action regarding Apple's request.

Apple has sought duty exemption on "manufacturing and repair units, components, capital equipment (including parts) and consumables ... for a period of 15 years," Chaudhary said in a written response to Parliament earlier this month. He said Apple's requests were examined "in the Department of Revenue [of the Finance Ministry] and have not been accepted."

All existing exemption to manufacturers from excise and countervailing duties will also be reviewed by the GST Council, he added.

Separately, Commerce and Industry Minister Nirmala Sitharaman said that Apple, in its communications to the government, has indicated its plan for "selective introduction of manufacturing lines in spring 2017."

An industry source told the Nikkei Asian Review that Apple's original plans to start assembling iPhone SE at the Bangalore factory of Taiwanese contract manufacturer Wistron by June this year, are "on track" though the company will have to wait for the GST rollout to chalk out further plans.

Apple does not make iPhones on its own but does it through contract manufacturers.

On the Finance Ministry not accepting Apple's demands, Manoj Gairola, founder and editor of Telecom Tiger, a news portal covering the industry, said it would be wrong to say that the government has rejected the requests.

"Since the whole taxation regime is changing in the country, the authority to decide [who will get what concession] has been transferred from the Finance Ministry to the GST Council," Gairola said. "Now this [request] comes under the purview of GST."

However, he added that any tax concession to be decided by the GST Council is expected to cover the whole industry and not just Apple.

Analysts also see huge potential for Apple to grow in India, the world's second largest smartphone market, with or without tax breaks for local manufacturing. The company holds a market share of just 2% in the country of 1.25 billion, where it is increasingly focusing due to a slowdown in China and the U.S -- the largest and third largest smartphone markets in the world. respectively.

Smartphone penetration in India is less than 30% of the total telecom subscriber base of 1.1 billion as of December 2016. With the recent entry of Reliance Jio Infocomm, the wireless venture of Reliance Industries which is offering pocket-friendly fourth-generation broadband services, the competition in the sector is heating up, prompting Bharti Airtel and other existing players to slash data tariffs.

In view of these developments, the scenario for smartphone growth looks very promising. "Within two years, smartphone penetration in India is expected to touch 600 million from the current 300 million," Gairola said, also noting that demonetization of 500- and 1000- rupee notes by the government in November last year saw the sale of smartphones surge by 18% as people started needing them for cashless transactions.

"The whole ecosystem [involving smartphones] is developing in India now, with the spread of 4G connectivity by telecom providers and the government's push for Digital India," he said.

"In the light of this, it makes sense for Apple to manufacture in India, with or without tax incentives, due to the huge potential for growth here. Besides, China is not viable for manufacturing anymore with rising labor costs, while labor in India remains inexpensive."

India is a price-sensitive market, and if Apple is able to sell an iPhone in the 20,000-25,000-rupee ($309-387) range, its phones "will sell like a hot cakes here," Gairola said, pointing to the strategy of market leader Samsung Electronics, which sells its high-end phone for about 60,000 rupees but at the same time offers devices in the range of 10,000 to 25,000 rupees.

More than 40 companies, including South Korea's Samsung and China's Xiaomi, have established manufacturing facilities in India, none of which have sought any extra incentives.

At present, the Indian government provides support to manufacturers under its Modified Special Incentive Package Scheme to boost electronics manufacturing. The MSIPS promotes large-scale manufacturing in the electronic system design and manufacturing sector by providing subsidies of up to 25% for capital expenditure.

Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
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Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 329,171.77M
Shares: 149.31M
Asia300

Reliance Industries Ltd.

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Market(Ticker): BOM(500325)
Sector:
Industry:
Energy Minerals
Oil Refining/Marketing
Market cap(USD): 77,520.98M
Shares: 3,251.73M
Asia300

Bharti Airtel Ltd.

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Market(Ticker): BOM(532454)
Sector:
Industry:
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Wireless Telecommunications
Market cap(USD): 26,184.29M
Shares: 3,997.39M

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