1

IEEMA PRE-BUDGET MEMORANDUM 2006-2007

PAGE NO

PREAMBLE 02 CRITICAL ISSUES & SUGGESTIONS 03-10 1. CONTINUATION OF REFORMS

2. INCLUSION OF POWER SECTOR UNDER “INFRASTRUTURE FACILITY” - SECTION 80 IA 3. VALUE ADDED TAX-VAT

4. FREE TRADE AGREEMENTS (FTA’S

5. SELECTIVE EXEMPTIONS/CONCESSIONS

6. DOMESTIC TAX STRUCTURE

7. SERVICE TAX

8. DEEMED EXPORTS ON PAR WITH PHYSICAL EXPORTS

9. SIMPLIFICATION OF PROCEDUES

ANNEXURE A CUSTOMS ISSUES 11-17

ANNEXURE B

1. CENTRAL EXCISE 18-22

2. PROCEDURAL ISSUES 23-25

ANNEXURE C IEEMA SUGGESTIONS TO THE MINISTRY OF POWER 06-07 26-36

2

IEEMA PRE-BUDGET MEMORANDUM

2006-2007 PREAMBLE

IEEMA (Indian Electrical & Electronics Manufacturers` Association) is the apex body representing the interests of Indian electrical and professional electronics industry, both in the private and public sectors. Indian Electrical and Electronics industry today has a gross annual turnover in excess of Rs 50,000 Crores or US $11Billion and exports worth Rs 5000 crores in 2004-05 The Domestic electrical industry is a mature and confident industry and has built up enough capacities to supply quality equipment on time for generation, transmission, distribution and utilization of power for the on going, upcoming and planned projects for the 10th and 11th plan periods. IEEMA thanks the Government of India for accepting a number of recommendations made by IEEMA in its Pre-Budget Memorandum 2004-05, including rationalization of Customs duty structure to a large extent and Introduction of VAT, which we trust is the first logical step in moving towards a Single Rate GST (Goods and Service Tax) as recommended by the Dr Kelker Committee to make India, a truly common market. IEEMA strongly believes that the Industry and the Government should work towards a common objective and help evolve policies, which are conducive to the development of a vibrant Domestic Industry, which would help in the growth of the nation and also help employment generation, be globally competitive and successful in export markets. IEEMA is however deeply concerned with regard to a few issues, particularly about the recent FTA’s with neighboring countries like Thailand, Singapore, Bangladesh and other countries. IEEMA fears that, announcements for free power distribution by some states, will further burden and increase sickness in the already ailing State Electricity Boards. Labour reform too needs to be taken up vigorously for the industry to remain viable and survive in an increasingly globally competitive scenario. The domestic electrical industry, which is at a take off stage and looking at expanding capacities, therefore seeks reassurance that the government will remain firm and continue on the path of reforms. We also hope that the government’s Power sector reforms and other programs for Rural Electrification will be provided increased funding through budgetary provision to help maintain its current momentum and its implementation in the planned time frame, enabling “Electricity for all” by year 2012.

3

IEEMA PRE- BUDGET MEMORANDUM

2006-2007 CRITICAL ISSUES & SUGGESTIONS IEEMA over the years has been representing the difficulties and concerns of the industry to the GOI through its pre-budget memorandum/presentations to the finance/power ministry officials, etc. and has met with limited success. IEEMA is approaching the government with renewed hope and puts forth before the GOI the 9 most critical issues/concerns of the industry requiring urgent attention of the Government: 1) CONTINUATION OF REFORMS The Domestic industry is upbeat as a result of the government’s commitment to add 40,000 MW during the 10th Five Year Plan and announcements of power sector reforms and other initiatives. The Indian Electrical industry is at a take off stage with regard to both domestic and global market scenario. Continuation of the reforms concerning Infrastructure, labour, banking, customs and procedures etc, is a must for the industry to remain globally competitive and face the inevitable competition from imports, given India’s WTO commitments, lowering import tariffs and increasing number of FTA’s. Our Suggestions Reforms be continued, to attract the much required investments in this critical sector. Urge by states to give away power free should be curbed. Labour reforms have become critically important, given India’s poor record in productivity. Suggestions of Dr. Kelkar Committee on tax reforms should be speedily implemented. This will help rationalize the Indirect and Direct Tax Regimes, streamline policies and procedure, reduce costs, boost the economy, exports and generate new employment opportunities. 2) INCLUSION OF POWER SECTOR UNDER “INFRASTRUTURE FACILITY” - SECTION 80 IA India’s overall growth has been averaging at about 8% since last few years, this could be boosted further if more electricity is made available, since power consumption is being directly linked with GDP growth. The government has provided a number of incentives for promotion of the much needed infrastructure. Benefits under Section 80 IA is one such incentive, which allows deductions to undertaking engaged in infrastructure development, operation and maintenance of certain infrastructure facilities such as roads, toll roads, highways, housing, water supply etc.

4

Benefits under section 80 IA are also available to undertakings, which are engaged in generation, transmission or distribution of power but in a restricted manner since turnkey contractors, who supply, operate or maintain the equipment are not allowed these benefits, as allowed for other infrastructure projects covered under this facility. This is also clear from the Form No. 10 CCB under IT Rules. Further these benefits are only for projects commissioned upto 31- 03-2006. To realize the dream “ELECTRICITY FOR ALL BY 2012 “. The government needs to take a number of steps to boost the power sector reforms and attract investment from more private players. One such step would be extending benefits under Section 80 IA of The Income Tax Act 1961 in full to this critically important sector. Such incentives have made the telecom sector an unqualified success. Our Suggestion Firstly, we propose that, Power Generation and Distribution business should be added to the list of “infrastructure facility”, appearing under INCOME TAX ACT- SECTION 80 IA, so that benefits currently available only to the owners of the projects will also be provided to developers and those engaged in operating and maintaining of such projects both in public and private sector. Secondly, deduction facility under section 80 IA should at least be extended for such projects commissioned till 31st March 2012, keeping in mind the Government of India’s Programme “Electricity for All by year 2012”. 3) VALUE ADDED TAX - VAT IEEMA congratulates the Government of India and the Empowered Committee for successfully implementing VAT from 1st April 2005. The most important achievement of VAT has been in limiting the tax rates to 2 slabs i.e. 4% and 12.5% for most of the goods. Unfortunately, some anomalies in respect of certain goods with which we are concerned have crept in.

Ongoing contracts in some states are facing problems due to the transition to VAT, and non-allowance of previously applicable rates.

CST applicable for interstate transactions too is creating its own complications, making purchase from outside state attractive despite some states providing refund of the difference in taxation vis-à-vis VAT.

A formula for the phasing out the Central Sales Tax (CST) on inter-state transactions – which distorts the VAT system – is yet to be worked out. Reportedly, the latest meeting of the empowered committee of state finance ministers had resolved to cut the CST from 4% to 2% effective from April 1, 2006. This is a step in the right direction,

5

Our Suggestion

We suggest that for a simplified uniform VAT, all the states should follow a uniform schedule based on the already well established HTS - HSN tariff code of classification used by customs and excise department. We suggest that a broadly classified item-wise list be prepared and released at the earliest Ideally, VAT should cover both goods and services. Dr Kelker committee recommendations should be followed to move to single goods and service tax i.e. GST By this a majority of the above mentioned problems could be avoided. It would also enable better tax compliance by industry and business community and reduce hassles caused by multiplicity of sales tax rates and complicated procedures prevalent in different States. 4) FREE TRADE AGREEMENTS (FTA’S) The steep rise in prices over the last one-year of Metals like Copper, Aluminum, Steel and polymers which are major raw materials for the electrical industry, has created a cost push effect and hit the industry very hard. Unbelievable escalation in fuel prices too has added to the woes of the industry. Despite all this the electrical industry has strived hard to remain globally competitive, adopting a number of innovative measures/strategies. India has entered into a number of FTA’s, which we agree, are essential in a globalized and liberalized environment. The recent FTA’s with Thailand, Singapore, and Bangladesh have thrown up new challenges for the domestic Electrical industry. Reportedly, these countries really do not have the manufacturing capability and industry to manufacture sophisticated electrical equipment and meet the value added norms stipulated in the FTA’s, and could act as conduits for re-exports from countries like China, Korea, Japan and Malaysia which have overcapacities in number of electrical products. Moreover, with regard to FTA with MERCOSUR, members fear intense competition, as some of the mercosur countries, which are well-established manufacturers of electrical products. The domestic industry apprehends dumping of finished goods as the FTA partner countries have comparatively lower import tariffs for e.g. FTA’s with countries like Sri Lanka (e.g. copper winding wire exports at ‘0’ duty) Bangladesh, Thailand and Singapore from where members fear dumping of products like copper wires and cables. Our Suggestion Custom duties on raw materials should ideally be brought in line, with those in the FTA partner countries. Government should tread cautiously and stipulate certification by approved Indian agencies for value addition norms and further consult / invite feedback form for apex associations before entering into future FTA’s.

6

5) SELECTIVE EXEMPTIONS/CONCESSIONS

The GOI in the previous union budget had thankfully rationalized the custom duty structure to a large extent, however some anomalies still persist which need correction (For e.g. Electrical Porcelain Insulators, appearing under HSN tariff code 8546 / 8547 attracts 10% import duty while a number of its raw materials are placed at 15%). Over the years a number of concessional / selective end use exemptions have been notified. However, with introduction of VAT and signing of number of FTA’S, rationalization of these Selective exemptions/concessions, which break the VAT chain or create anomalies in the duty structure, has become paramount. This would also help increase government’s revenue. A typical example is when the previous government in its mini- budget on 8/1/2004, allowed capital goods imports for Transmission, Sub- transmission and distribution projects, at a reduced rate of 10% customs duty without corresponding reduction in import duty of input raw materials. These concessions were apparently granted to reduce project cost. However they ended up as a serious concern for the domestic industry as the necessary corresponding reduction in the import duty of the raw materials required for such products was not provided for in the said notification. Similar is the case of “Zero” duty imports of self soldering/ self bonding enameled winding wires appearing in list A of custom notification 25/99 dated 01/03/1998 for the electronics sector, adversely impacting the domestic industry.

Our Suggestions

A thorough study should be instituted, for further rationalizing the duty structure, clearly identifying finished goods, intermediates and raw materials to avoid classification disputes.*(refer CUSCREDIT scheme below) Provide a level playing field for Domestic industry, allow it to import raw materials at duties lower or equal to concessional imports allowed for finished goods supplied to Mega power and other projects like T & D etc. * SCHEME DETAIL FOR CUSTOMS CREDIT (CUSCREDIT)

Logically, the import duties on finished products should always be higher than on intermediates and raw materials. In Electrical and Industrial Electronics Industry although the government has rationalized the duty structure to a large extent, anomalies still exist in case of some products, where the import duty on finished products is either lower or equal to that on intermediaries and raw materials. IEEMA recommends the two-tier duty structure preferably with a 5% differential with lower duty on Raw Materials and Intermediates and higher duty on finished products.

7

However, we caution that utmost care be taken while classifying raw materials, intermediates and finished goods as what may be finished goods for one industry, may be the input Raw Material or intermediates for the user industry (e g Electrical Steel is a Finished product for the Steel Industry but a Basic Raw Material for the Motor, Transformer and Switchgear Manufacturers). There could be classification disputes and confusion arising out of the same since the pressure groups would like to ensure that their product is classified to their advantage. In case of the goods which are required to be cleared at the higher duty when used as inputs in domestic manufacture (with minimum value addition criteria) be allowed customs credit for differential duty by evolving a scheme similar to the CENVAT scheme. The same can be termed as CUSCREDIT, the detailed scheme and the table giving proposed duties appears below: The scheme is almost similar to Modvat scheme, which was introduced in 1986-87 is now upgraded to CENVAT. The major difference is that the credit of duty will not be available for the entire customs duty paid on input products, but will be restricted to some portion of the same. If you recall, the Kelkar Committee Report has recommended to finally bring down the customs duty structure to basic 4 levels in which Zero is recommended for some special goods like life saving drugs, defence equipment, etc. and 15% for some demerit goods. In all other cases, the Committee has recommended two rates. 10% is recommended for raw materials, inputs and intermediate goods and 20% for finished goods.

It is a well-known fact that it is not only difficult, but also impossible to classify all products covered under HSN in 2 or 3 categories viz., raw materials intermediate products and finished products. As a result of this, the recommended structure will be prone to aberrations which will activate pressure groups for getting products of their interest classified in higher / lower customs duty groupings depending on their interest as a producer or user.

If we are adopting only two steps of say 10% and 15%, then the differential of the two 5% in this case) will be given as a credit only to those who produce excisable products. This credit can be used for payment of excise duty only and can be paid in cash in exceptional cases as export draw back. The imported products will not be permitted to be cleared as such from the factory without special permission and in such an event, the Assessee will be required to pay duty corresponding to duty actually paid at the time of clearance.

For example if an importer imports a “final” steel product, falling under T.I. 72.25-“flat rolled product of other alloy steels”, costing say Rs.1 million (Rupees ten lakhs), he will pay customs duty of Rs.1,00,000/-, (Rupees one lakhs only), @10% at the time of clearance. If the importer is a manufacturer of excisable products falling under say T.I.85.01-Electrical motors -, he can take a cuscredit of duty at Rs.50,000/-, when the material is brought in his factory for using in production of excisable goods i.e. electric motors. But if the importer is a builder, who wants to use the same as roofing, he will not be able to take the cuscredit. Thus for an electric motor manufacturer the effective duty will be Rs.50,000/- (Rupees one lakh only), while for a builder the effective duty will be Rs.1,00,000/-, though at the time of clearance both have paid the same duty. We have taken example of product under 72.25, since many experts will consider this as “final” product, while the Electrical industry or industry manufacturing “stampings and laminations” consider that the product is an intermediate product. For that matter even stampings and laminations are intermediate products.

8

The identical situation will occur, if a product designated by CBEC as “intermediate product” on dominant end use basis happens to be a raw material to the importer, who produces an intermediate product, such as cc rods from cathodes. A very complex example is an electric motor driven pump-set a product, which even the highly experienced people will recommend for inclusion in the “final” product. But if a machine tool manufacturer imports it for using the same as a cooling pump, for the tool/job cooling he should be eligible for taking cuscredit. Customs duty credit should be permitted only for direct imports with all import documents and duty paying documents in the name of the excise Asseessee. The scheme can be easily implemented for manufacturing industry. We have no doubts that after due deliberations with all experts, the scheme can be successfully implemented. The cuscredit system will assist industry by giving it a competitive edge through effective reduction in prices of inputs. The scheme will also promote competition, indigenous value addition and employment generation. The scheme is revenue positive by itself and by reduction in smuggling, will promote exports. 6) DOMESTIC TAX STRUCTURE

The domestic industry in addition to the inverted duty structure in relation to project imports also faces some more disadvantages like • Entry Tax on inputs • Double Freight cost on raw material inputs • Higher Power Costs • Higher Finance Costs

These disadvantages can be quantified in percentage terms to be of the order of almost 15%-25% making domestic supplies uncompetitive vis-à-vis imports.

India unfortunately still suffers from severe weaknesses of infrastructure facilities including bad roads, congested ports, higher handling charges etc. This apart from the high transaction cost for exports. From a study of similar infrastructure facilities and transaction cost in China, Sri Lanka, Singapore, Malaysia and even in some cases Thailand, it is observed that our financial costs and time taken for such services for similar cargos is generally 100% more. While improvement in infrastructure facilities should be on top priority, the level of DEPB facilities should be allowed 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.

Reportedly, the DEPB scheme is being discontinued from 1st January 2006 and will be replaced by another improved scheme.

Our Suggestions 1) Uniform nationwide VAT has still not become a reality (Since, only 21 out of 28 states

have opted for VAT ) and some of the above problems still exist.

9

2) The new scheme replacing DEPB should be devised so as to effectively compensate for the built in infrastructural disadvantages, to help maintain the domestic industries global competitiveness and provide a “truly level playing field”.

7) SERVICE TAX

Services contribute more than 55% to our country’s GDP, as of now more then 70 services are covered under the service tax regime. The Service tax law is relatively new. New services are being added and exemptions are given for certain services in the public interest through notifications and circulars.

While the notifications and circulars have been helpful in explaining the service tax law, there are also instances where certain specified services are not explained clearly, leading to confusion.

Our Suggestion

There is urgent need for improvement of tax administration, simplification and rationalization of service tax law for easier implementation and compliance. Dr Kelker Committee’s recommendations for ultimately moving towards a combination of VAT and service tax as GST- Goods and Services Tax should be seriously pursued. 8) DEEMED EXPORTS ON PAR WITH PHYSICAL EXPORTS Presently supplies under deemed exports, are not treated on par with physical exports with respect to duty drawback, direct tax and excise duty. With regard to excise duty at present, the suppliers to the project authority are required to pay the excise duty @ 16% and then wait for period spanning more than 6-9 months after filing cumbersome applications for refund of terminal excise duty. This time delay leads to unnecessary blocking of the working capital for long periods increasing costs. . The foreign manufacturers, who supply to these projects, do not have these hardships since their supplies are totally duty free. Our Suggestion IEEMA feels that Deemed Exports should be treated on par with Physical exports thereby providing a level playing field with regard to the payment of terminal Excise Duty and other benefits available to physical exports to help promote the domestic industry and further increase exports.

9) SIMPLIFICATION OF PROCEDURES In today’s globalized and highly competitive scenario, time is money and cutting costs all around is the business mantra. To effectively achieve this simplification of day-to-day procedures is a must. Manufacturers instead of concentrating on their core activities have to grapple with the day-to-day difficulties due to complicated and easily mis-interpretable procedures in addition giving rise to corruption. The SME’s are more seriously impacted by the complicated procedures and red tapesim.

10

A current example is the, “Road Permit Raj” adopted and unleashed by a few states. Reluctance/delays in issual of road permits by a few states has created major hassles for manufacturers, hampering trade and timely deliveries leading to invoking of the LD clause, and unnecessary litigations and increase in costs. Domestic manufacturers are already burdened with many disadvantages vis-a–vis foreign suppliers. Procedural difficulties adversely affect the Indian industry making them less globally competitive. Our Suggestion

The Govt. should take immediate steps to rationalize and simplify the policies and procedures, which effect the day-to-day functioning of domestic manufacturers since complicated and difficult to understand policies / procedures lead to misinterpretation, litigation and corruption. Easy to understand and implement policies / procedures will definitely help the Indian industry become more competitive. These initiatives will attract more new investments and generate employment. It will also result in better tax compliance, increase revenue and reduce unnecessary litigations / disputes, which are a national waste.

We sincerely hope that the Government of India will give due consideration to IEEMA’s Pre- Bud Memorandum 2006-2007.

Note: Some more issues on Customs are discussed in ANNEXURE A Other issues including Central Excise & Procedural are discussed in ANNEXURE B.

11

ANNEXURE A Customs

• CUSTOMS ISSUES - REDUCTION IN DUTIES OF RAW MATERIALS

Copper Wire Rods & Copper Cathodes falling under Chapter 74 Wire Enamels falling under Chapter 32.

Enamelled Copper Wires made from Continuous Cast Copper Rods are an important Raw Material for the entire Electrical Industry comprising Motors, Alternators, Transformers, Electric Meters, Agricultural Pumps, Consumer Electronics, Auto Electricals, etc. Continuous Cast Copper Wire Rods and Wire Enamel are the principal inputs for making Enamelled Copper Wires.

Continuous Cast Copper Wire Rods are produced in India by three primary producers totally amounting above 4,00,000 MT, Domestic Sales are about 52% of total production whereas Exports are about 48%. Duty Paid Imports of Continuous Cast Copper Wire Rods are nominal at around 10,000 MT per annum.

Facts: • Wire Enamels are produced in India by one multinational and a few SSI producers. • Currently the Customs Duty levied on the principal inputs for making Enamelled Copper

Wires i.e. Continuous Cast Copper Wire Rods and Wire Enamel is 10% and 15% respectively.

• The Customs Duty levied on the principal input for making Continuous Cast Copper Wire

Rods i.e. Copper concentrate / Ore is 5%. and this benefits a very small upstream copper industry with an employment potential of about 2000 persons. Unfortunately, the down stream industry which forms bulk of all manufacturing activity in the country and therefore has bulk of employment generation potential is made to pay the higher duty of 10% for its raw material requirements.

• Copper Prices have risen from US$ 1600 to more than US$ 3900 in the last 28 months. • The Duty protection to producers of Continuous Cast Copper Wire Rods of 10% in India

is much higher than the standard prevailing in neighbouring and Asean countries. • Consequently the Domestic prices of Continuous Cast Copper Wire Rods are higher

than prevailing in neighbouring and Asean countries. • In the last 28 months the CIF rate of Copper Rods has increased from Rs. 82,000 per

MT to more than Rs. 2,00,000 per MT. • Since Imports are nominal the Government has not received the benefit of additional

revenue due to the higher CIF price of Copper. • Total Revenues by way of Customs Duties on Imports of Continuous Cast Copper Wire

Rods are estimated at not more than Rs. 30 Crores.

12

ANNEXURE A Customs

However this has translated in to windfall gains for the manufacturers of Continuous Cast Copper Wire Rods. The Government has initiated various welcome measures to integrate the economy with our neighboring countries and in the process has signed or is about to sign Free Trade Agreements with some of them. Further large volumes of Enameled Copper Wires are imported into India under sectoral concessional notifications for specified end uses (at ‘Nil’ duty under Customs Notification 25/99 dated 28.2.1999) Due to inadequate monitoring of Imports under Concessional Tariff there is rampant misuse of these provisions. These Policy measures along with higher Domestic price of Continuous Cast Copper Wire Rods and Wire Enamel has adversely improved. The Enamelled Wire manufacturers in the neighbouring and Asean countries pay no Customs Duties on their requirement of Continuous Cast Copper Wire Rods and Wire Enamel when used for Export production. Further Enamelled Copper Wires imported into India from these countries attract no Customs Duties. Conversely Indian producers of Enamelled Copper Wires have to pay a price for their inputs on the basis of prevalent Import Duty rates i.e. 10% and 15% respectively. The result is that manufacturers in Nepal, Sri Lanka, Malaysia and Thailand are increasingly selling more and more Enamelled Copper Wires into India. Reportedly imports into India in Fiscal 03-04 was 70,000 MT at Zero rate of Customs Duty from Sri Lanka under ISFTA and about 12,000 MT Duty-Paid from elsewhere.

The Government of India had thankfully taken cognizance of this increased imports of copper products and subsequently issued a ban order on chapter 74 imports in September 2003. However, after a brief interval some manufacturers and traders have started once again to import copper products, but under chapter heading 854410 under the guise of cables, intelligently exploiting the loop holes in the system. The success of these countries in selling Enamelled Copper Wires in India is a result of the denial of inputs to the Indian producers at prices comparable to their competitors.

We reiterate that the Indian Industry is eminently capable of meeting the requirements of the Indian consumers as well as substantially increased Exports of Enamelled Copper Wires. Our Suggestion IEEMA requests a level playing field with other producers in neighbouring as well as Asean Countries who sell their products in India.

Internationally competitive prices of Continuous Cast Copper Wire Rods and Wire Enamel will lead to lower costs of Enamelled Copper Wires. This in turn would lead to a catalytic effect on the competitiveness of Electrical Equipments manufacturers in India and allow them to substantially increase their exports from the current level of approximately Rs. 4800 Crores.

13

ANNEXURE A Customs CABLE INDUSTRY The Cable industry India is a mature industry with enough idle capacity and contemporary technology to meet the demands of the expanding power sector. Cables are highly raw material intensive items. The difference in the customs duty on finished products and raw materials is negligible, thus the scope for value addition is reduced, making imports attractive. Today domestic manufacturers are not able to book orders for projects where Project Authorities are importing finished cables although domestic industry has got ample capacity to cater this requirement. Imports of cables are also easily allowed under FTA’s from countries like Thailand with applicable Customs duty of only 5% and from SAARC countries at 0%, which is having a very bad effect on the cable industry. The domestic industry, which is underutilized, can very well cater to the requirement of power projects in India. In view of this finished cables should be excluded from the scope of prevailing bilateral trade agreements. Cable should be put in negative list. Further, our members have reported that the various FTA’s and SAARC agreements are being misused for importing the basic raw materials into the country without any value addition. This also adversely affects the cable industry. Our Suggestion In view the above we request he GOI to consider reducing the Customs Duty on various raw materials for cables like Copper, Aluminum, PVC, Polyethylene etc. to 5% from the existing rates of 10/15% & maintain customs duty for finished Power Cables atleast 5% higher then the duty on raw materials. This will enable some value addition.

PORCELAIN INSULATORS

Insulators, though cost wise insignificant (approx 2%) in the over all project cost, are a critical link in the Electrical Transmission and Distribution chain, our members are major manufacturers and export almost 60% of their production. Insulators can be imported through the normal route at the rate of 20% Basic Customs Duty, while for some T&D projects they can be imported at 10% duty. Unfortunately the raw materials required for manufacture of Insulators as per the Table appearing below are placed at 15% to 20 % and require to be lowered. We therefore suggest that the duties on calcined alumina, ball clay and castings be reduced to 5%.

14

ANNEXURE A Customs

S.No. Problems faced Product & Tariff Heading Description of problems and difficulties

Probable Suggestion/Solution

1

Anomaly in the basic customs duty on Insulators vis-à-vis raw materials imported for Insulators

Ball Clay MCI Caps Epoxy Resin Epoxy Hardner Blue Stain Filter Cloth

2508.40 7325.10 3907.30 3907.30 3204.90 5911.20

The Customs Duty for these items are higher than the Customs Duty on the finished product (ie. Insulator @ 10%) under Notification 7/2004 issued on 8th January 2004 where Insulators for Power Transmission, Sub-Transmission and Distribution Projects can be imported with a basic Customs Duty of only 10%.

Duty to be reduced to 5% for these items

2 Manufacture of Insulator is very fuel-intensive. Substantial quantities of liquid fuels such as Diesel, Kerosene etc. are being used not only to fire the Kilns but also to keep the generators running. Being a continuous process industry, break in power supply would cause total loss of products worth several lakhs of rupees.

LPG/LNG

2711.19.00

The industry is slowly shifting to the usage of LPG/LNG, which is technically superior and a more efficient fuel. But, it is faced with the problem of on-going increase in cost of this fuel.

Import duty on LPG to be reduced to Nil% from 5%.

4

5% Customs Duty has been specified in the list 44 under Custom Notification No.26/2003-Cus dated 01-03-2003 for Polymeric Insulators without any reference to any specific voltage rating. Whereas all other equipments in this list are specifically stated for 765 kV

Chapter 84

It is proven fact that the Ceramic Industry in the country has established facilities for the manufacture of Insulators for all types of system conditions and for ratings upto 400kV. In fact exports of Insulators for net works for 400kV are regularly taking place. For products like Transformers, Circuit Breakers 5% Customs Duty is specified only for 765kV. So for Polymeric Insulator also it should be for 765kV only. Such a low customs duty would affect the viability of Indian Porcelain Insulator Industry, who employed more than 20000 people.

Customs duty for Polymeric Insulator also should be 5% for only 765kV in line with the other products indicated in the list.

Further, as per the above Table the industry is slowly switching over to usage of LNG / LPG for firing the Kilns (Furnaces) and running the generators, etc. LNG / LPG are more fuel efficient with higher calorific value and less polluting. Fuel prices have been showing drastic rise since last few months and the effect on the manufacturers is huge.

Our Suggestion We therefore suggest that to partly offset the rise in prices, customs duty on LPG be reduced from 5% to “Nil” duty.

15

ANNEXURE A Customs 5% IMPORT DUTY ON HIGH VOLTAGE T&D EQUIPMENT NOTIFICATION NO. 26/CUS DTD 1/3/2003 The Government, vide its notification No. 26/cus dated 1st March 2003 has amended Notification No. 21/cus date 1st March 2002 by including an entry 424, which as under:

S. No. Chapter or Heading No. or sub-Heading No.

Description of goods Standard rate

Condition No.

(1) (2) (3) (4) (6) 424 84 or any other

Chapter Goods specified in List 44 required for use in any high voltage power transmission project

5%

91

The list No.44 mentioned above includes various types of goods required for use in high voltage transmission project and the effect of the above amendment is to allow import of such goods at a concessional basic customs duty of 5% subject to condition stipulated in Condition 91.

Several existing manufacturers had plans to establish manufacture and were engaged in either developing the technologies for the same or having discussions with prospective foreign collaborators to do so. The low duty of 5% imposed on such goods has deterred foreign manufacturers from extending technology/participation in local manufacture, as they would prefer to supply the complete finished product from overseas itself. To enable domestic manufacturers to develop these goods, it is necessary to motivate them by offering a similar duty structure for raw materials and components required by them for manufacture of these goods in India. The Government had already acknowledged this fact by allowing similar provision under the same notification for other goods (kindly refer to Sr. No. 425, 425 etc.)

Sr. No.

Entry as appearing in Column 3 of Entry No 424

Proposed Entry for appearing in Column 3 of Entry No 424

424 Goods specified in List 44 required for use in any high voltage power transmission project

Following goods for use in any high voltage power transmission project, namely: (1) Goods specified in List 44 (2) Raw materials and components for manufacture of goods at (1) above.

Our Suggestion IEEMA therefore requests GOI to consider modifying the wording of the Column 3 of Entry No 424 as under by adding a suitable para so that raw materials and components required for manufacture of these goods in India are also available at the concessional rate of 5% for domestic manufacturers

REQUEST FOR AMENDMENT TO ENTRIES IN LIST NO. 44

We further draw your notice to the list of goods added to list 44, some goods have been correctly and explicitly classified, either by their voltage ratings or by their applications. However, one entry appearing in the same list, viz; Polymer Long Rod Insulators (Sr No. 9) had not been defined explicitly by specifying voltage.

16

ANNEXURE A Customs Introduction of such an entry will seriously affect the substantial capacity established in the Country today for the manufacture of these goods by established companies. The existing entry in the List No. 44 and our proposal for change

Sr. No. Entry as appearing in List No. 44

Proposed Entry for appearing in List No. 44

9

Polymer Long Rod Insulators

Polymer Long Rod Insulators for 765 KV applications

Our Suggestion In view of the above, we suggest that import of Polymer Long Rod Insulators, if allowed should be limited to 765 KV applications and above INDIAN ELECTRICAL EQUIPMENT INDUSTRY VIS-À-VIS FOREIGN SUPPLIERS – DISADVANTAGES

The domestic industry in addition to the prevailing inverted customs duty structure also faces some more disadvantages due to local levies, duties, taxes, lack of adequate infrastructure, number of procedural problems, misinterpretation of law etc.

The table appearing below clearly brings out this point, it can be noted that the domestic manufacturers due to a plethora of taxes and other factors beyond their control are at a disadvantage of almost 15% - 25%, affecting their competitiveness Disadvantages faced by the Indian Electrical Equipment Industry vis-à-vis Foreign Suppliers - due to factors that are extraneous to the Industry

Factor Description Reason Disadvantage vis-à-vis

Foreign Supplier VAT Varies between states

(Ranges 4 % to 12 %) 4.6 % to 13.9 %

Financial Cost for reimbursement of Terminal Excise Duty (*)

16% @ 10% 1.6 %

Entry Tax/ Octroi 2.50 % on material 1.3 % VAT on indigenous inputs 4 % on 12.5 % 0.5 % Customs Duty of consumables 25 % on 5 % 1.25 % Differential financing cost 4 % differential in Indian & foreign interest

rates on 40 % working capital 1.6 %

Total (Tangible Factors) 10.75 % to 20.05 % Intangible factors Inadequate infrastructure, Power, transport,

ports etc. 5 %

Grand Total 15.75 % to 25.05 %

(The above mentioned disadvantages remain uncovered in cases where zero - e.g. Mega Power Projects or marginal - e.g. Fertilizer, Refineries, Power Projects rates of Customs Duty apply)

17

ANNEXURE A Customs Our Suggestion The domestic manufacturer faces a disadvantage of almost 16-25 % vis-à-vis overseas supplier, to maintain competitiveness of the Indian industry, IEEMA suggests that the Central government in co-ordination with the state

Government should rationalize/evolve policies helping reduce the number of taxes, simplify procedures, reduce transaction cost, financing cost, etc.

Critical Infrastructure like roads, ports, and airports too require drastic improvements to increase throughput with faster clearance and reduced dwell time. WAREHOUSING OF GOODS FOR EXPORT

An exporter can establish warehouse to store goods meant for export manufacture in different manufacturing units or vendors. (Notn 46/2001 CE dated 26.6.2001). CBEC grants permission for place of such warehouse and class of exporter like “Super Trading” or “Trading House” (Circular 581/18/ 2001 dated 29.6.2001).

All manufacturer-exporters exporting multi products manufactured in different manufacturing units and procured from their vendors are not eligible to this warehousing facility. Manufacturer-exporters have to therefore depend upon the CHA for storing and consolidation of export goods. This leads to increased transaction cost and delivery period.

Our Suggestion This facility should be extended to all manufacturer-exporters also. The jurisdictional Asst./ Dy. Commissioner should be empowered to grant registration to such warehouse.

BOOST TO ENERGY EFFICIENT PRODUCTS In view of the continuing energy shortages including rising peak demand shortages, investment and environmental concerns, the GOI has started in right earnest to save energy at various stages including at the user end. The Bureau of Energy efficiency, BEE, is actively promoting energy saving measures including awareness programmes, IEEMA too is playing a supporting role. Various products like Motors, Transformers, Capacitors, CFL’s etc are in the process of being labeled as per their energy saving capacity and are being allocated Star ratings by the BEE. These initiatives are laudable.

Our Suggestion

The GOI should provide further boost to the Energy conservation initiatives. As a start, procurement of certified energy efficient products by PSU’s and government agencies including PWD’s should be encouraged. Financial packages for such procurement too should insist on of labeled Energy Saving products. Government should devise innovative schemes to promote end-use energy efficiency, energy labeling and energy audits, benchmark and enforce energy efficiency in power intensive industries like aluminum, fertilizers, iron & steel, cement, paper and chemical NOTE: A number of such issues brought to our notice by our members are enumerated in Annexure B, which follows

18

ANNEXURE B Central Excise

• CENTRAL EXCISE

CENVAT & JOB WORK

• A manufacturer availing CENVAT can send his inputs to a job worker under rule 4(5)(a) for further processing and get back the processed material.

• The job worker cannot avail exemption under notification 214/86 if he needs to add his own material. In such cases, the job worker has to pay excise duty on full value, which includes the value of material received by him under rule 4(5)(a).

• The input supplier supplying inputs under rule 4(5)(a) can avail CENVAT of duty paid by job worker. Thus the transaction is revenue neutral.

• Excise auditors are raising objections to such transactions. Our Suggestion Accept Supreme Court’s decision in case of International Auto Ltd. Vs CCE, Bihar [2005 (183) E.L.T. 239(S.C.)] holding that job worker is not liable to pay duty on inputs supplied by final product manufacturer.

Amend relevant rule 4(5)(a)/notification 214/86 CE dt. 1.3.86 suitably.

EXEMPTION & REVERSAL OF CENVAT

• GOI issues many end use based exemptions like supplies to Water Treatment Projects, Non-conventional energy devices, Defense, Navy etc.

• The manufacturer supplying goods to such projects without payment of duty have to

reverse actual CENVAT or pay an amount of 10% of price in lieu of CENVAT claimed in terms of CENVAT Credit Rule 6(a)(b).

• This amount is not recoverable from customer.

• However, this results in increased cost of products and negates the objective of giving exemption.

Our Suggestion Instead of granting full exemption, excise duty of 4% to 8% should be levied on such goods for operational convenience. Alternatively, CENVAT credit on inputs used in these supplies should be allowed & utilized for other domestic clearance in line with supplies to deemed export, physical exports. The relevant notifications/CENVAT Credit rules should be suitably amended.

19

ANNEXURE B Central Excise

VALUATION OF EXCISABLE GOODS - RULE 6 OF VALUATION RULES: AMORTIZATION OF COST OF TOOLS.

Many large industries get components/intermediate goods manufactured by SSI / Auxiliary industries. This leads to blocking of fund of such SSI/Auxiliary industry, creates unnecessary confusion and increases litigation. Our Suggestion It is suggested that where the SSI/Auxiliary industry is supplying components/ intermediate goods to OEMs, excise duty should be charged on transaction value of such SSI/Auxiliary industry only.

Since such SSI/Auxiliary industry cannot afford to spend for high cost and precision tools, large industry supply them necessary tools as free issue on temporary loan basis.

Since the large industry claims CENVAT of duty paid by such SSI/Auxiliary industry, there is no accrual of revenue to the government.

Our Suggestion

Clause 4 (a) Notification 8/2003 & 9/2003 CE dated 1.3.2003 can be referred to for similar provisions.

The valuation rules under excise require the SSI/Auxiliary industry to pay excise duty on amortised cost of tools provided by large industry. AGRICULTURAL PRODUCTS – CONCESSIONAL RATE OF DUTY The government of India has been actively and rightly supporting the agricultural sector, which largely drives the other sectors. A number of subsidies and incentives have been extended to this important sector. Our members manufacture Motor Starters and Power Driven Pumps and submit as below: • Motor Starters are mainly used by agriculture sector. • It attracts excise duty rate of 16%. • Specific goods intended to be used for the installation of a cold storage, cold room or

refrigerated vehicle, for the preservation, storage or transport of agricultural produce – Notification 6/2002 (Sr No 196) - Duty Nil

• Tractors -Notification 6/2002 (Sr.No. 295) – Duty – Nil • Power driven pumps primarily designed for handling water – Notification 10/2003 (Sr No

35) Duty – 8% Our Suggestion IEEMA suggest that Motor Starters should be subjected to 4% excise duty rate.

20

ANNEXURE B Central Excise INTEREST CHARGES ON UPWARD PRICE VARIATION CLAIMS Our members who enter into a numbers of contracts with State Electricity Boards and other utilities normally use the price variation clause wherever applicable. Members have informed us that the Excise Department has been insisting for payment of interest on the Duty amount whenever there is an upward revision of price variation under Section 11 AB of Central Excise Act Normally the Indices are obtained and a draft of the PV working is prepared and sent to the utilities for approval. Only after receipt of approval from the utility the supplementary bill is prepared and submitted. The entire process normally takes 1 to 4 months from the date of despatch. The excise departments claim for interest is an additional burden and no utilities will entertain / reimburse or pay the interest. The supplier has to solely bear this burden. Further, in case of downward revision of prices, again the sufferer is the supplier. IEEMA feels that the Central excise claim on upward price variation is not fair and should be done away with. Our Suggestion We request that a suitable amendment to the said section in the Excise act should be made and insistence for interest on Duty amount in respect of upward price variation claims may be issued. STORAGE OF EXCISABLE GOODS WITHOUT PAYMENT OF DUTY OUTSIDE THE FACTORY PREMISES Rule 4(4) of Central Excise Rules, 2002 empowers Commissioners to permit manufacturers to store excisable goods without payment of duty in any storage place outside the manufacturing premises, in exceptional circumstances, for a short period Excise is a levy on manufacture but the payment of duty is deferred till the removal of goods for convenience. The rules in this regard were relaxed to make duty payment on monthly basis from 1.4.2003. However, this facility is available only to goods, which are lying in factory of production Our Suggestion If the manufacturers are permitted on regular basis, to remove excisable goods to their stocking points without payment of duty for stock and sale, raise excise invoices from such stocking points and make excise duty payment on monthly basis from the respective factory of production, the industry will get a great relief. • There are many industries, which have established a network of stocking points all over

the country to stock their finished goods at such stocking points and meet the need of

21

ANNEXURE B Central Excise • local customers at shortest possible time. However, in this process such manufacturers

have to pay excise duty before removing such finished goods from factory of production and this payment gets blocked till the goods are sold from such stocking points.

• Such stocking points can be considered as “Warehouse” and the ware housing

procedure can be followed with suitable changes in all related rules. Our Suggestion The present Rule 7 of Valuation Rules is very complicated to follow especially for companies having multi-products, multi manufacturing units and sale through network of their own stocking points.

C.B.E. & C. Circular should be amended to include manufacturer-exporters cum merchant-exporters in class of exporters eligible for export warehousing. • The said notification further empowers the Board (CBE&C) to specify the place for such

warehouse and the exporter or class of exporters to whom the permission can be granted under this rule.

• The manufacturer-exporter cum merchant- exporter has to export the goods

manufactured by their different manufacturing units. Some goods are even procured indigenously and exported.

Our Suggestion In fact, the Commissioners/Dy. Commissioner or the Asst. Commissioners should be empowered to grant necessary registration to exporters desiring to establish export warehouse, on merit.

If the export warehousing facility is extended to companies having multi product and multi locational, it will help them to reduce transaction cost and become cost competitive and also adhere to delivery commitments to overseas customers.

CENTRAL EXCISE - AUDIT EA 2000 The CBE&C has issued circular 731/47/2003 dated 1.8.2003 withdrawing the scheme of audit under Audit Protocol. The Audit Protocol Scheme was better option as it provided an agreement between industry and the excise department at senior level. Our Suggestion

We request that the Audit Protocol Scheme should be reintroduced. The list of documents to be made available, the number of days for audit, name of protocol manager for discussion on major issues could be part of the agreement and this could help to avoid disputes/litigations.

22

ANNEXURE B Central Excise

CENVAT - VALUE AND RATE OF EXCISE DUTY FOR CAPITAL REMOVED FROM THE FACTORY: • Under rule 3(4)(c) & 3(5) of Cenvat Credit Rules 2002, when inputs or capital goods, on

which CENVAT credit has been taken, are removed from the factory, the manufacturer of the final products has to pay an amount equal to the credit availed in respect of such inputs or capital goods

• The amended rule does not provide for payment of excise duty on depreciated value.

Due to the reversal of CENVAT at the time of clearance of used capital goods, the excise duty payment is sometimes more than the value realised on sale of such capital goods.

Our Suggestion

The rule as existed prior to 1.3.2003, read with CBE&C Circular 495/16/93 should be restored whereby the manufacturer could pay duty on depreciated value of capital goods. In case of inputs sent from factory to the job worker under rule 4(5)(a), the credit is immediately allowed on receipt of material.

23

ANNEXURE B Procedural • PROCEDURAL ISSUES

SUPPLIES AGAINST INTERNATIONAL COMPETITIVE BIDDING

The Indian electrical industry has exported electrical and electronics equipment worth almost Rs.4,800 crores in the last fiscal. The domestic industry also actively participates in international competitive bidding. Supplies against International Competitive Bidding are exempted from excise duty if the goods are exempted from Customs duty and CVD on imports

However, members have reported difficulties due to lack of proper laid down procedures for availing exemption / submission of documentation etc. This usually leads to misinterpretation and

Further, members apprehend that such non-clarity may result in audit observation and / or litigation denying the exemption to manufacturer at later date Our Suggestion CBEC should immediately issue suitable circulars clearly giving procedure and documentation required to be followed for seeking exemption under ICB. IMPACT OF NEW NOTIFICATION SALES TAX DECLARATION FORMS C, F, I/EII A recent notification no. 588(E) dated 16/09/05 issued by the Government of India, relating to the above subject which is having far reaching implications for entire Electrical Industry. As per this notification the Central Sales Tax (Registration & Turnover) Rules 1957 have been amended bringing about a sea change in the existing procedure relating to Sales Tax Declaration Forms C, F, EI/EII. Under existing provisions, one Declaration Form is allowed to be issued in respect of all transactions between the parties conducted during the entire financial year. Thus currently, there is concept of one form – One Client covering the entire year’s transactions made between the two parties. Further, no time limit is prescribed for issuance of such forms and same are allowed to be furnished by the relevant assesses to the Authorities at any time before completion of Assessment which normally takes 2 to 3 years. This system is fairly smooth though assessees are facing problem in most of the States to get the blank Declaration Forms from the authorities and therefore Industry has been requesting Govt. to allow said Declaration Forms to be printed on the stationery of the assessees which will also enable them to use computer support which is not available now. However, this well established procedure has been revised by above notification in the following manner w.e.f. 01/10/2005: a) A single declaration form will cover all transactions between the parties conducted in a

quarter of the financial year. b) In case one single transaction is spread over more than one quarter, separate

declaration forms are required for each quarter for the said single transaction for the various deliveries of the said transaction.

24

ANNEXURE B Procedural c) The above declaration form is required to be furnished to the prescribed authorities

within the period of 3 months from the end of the relevant quarter. We feel that these changes are bound to cause tremendous hardship to all assessees throughout the country. This procedure will also lead to additional workload both for the industry, unnecessarily adding to costs in a highly competitive environment. The Sales Tax department will be unnecessarily overloaded with the Industry’s demand for huge number of Forms (four times than now), leading to more backlog. Non-availability of such forms in large numbers could also result in delays and litigation, leading to national waste. We enumerate below in detail, the anticipated difficulties: 1. The blank declaration forms, which are required to be obtained from the authorities, are

always in scarcity even with the currently followed system of Forms on yearly basis.

2. With the of declaration forms required for submission on Quarterly basis under the revised procedure, the scarcity problem will multiply manifold and assessees will be running pillar to post for obtaining of such blank forms.

3. In some states like Uttar Pradesh, Bihar, Orissa and Jharkhand etc., currently scarcity of

declaration forms is so acute that buyers are not in a position to obtain blank forms even after a gap of 3 to 5 years. In these States where large quantum of purchases are made by various Companies in organized sector due to heavy investments, the situation will further worsen.

4. The prescribed time limit of 3 months is very short and impractical. In all probability, in

most cases blank form will not be available to the sellers from their buyers, which will result in avoidable delays, which in turn could result in litigations.

5. New procedure, if implemented, will have an adverse impact on human resources, since

number of Forms will be far too many to handle in a quarter. This will put unnecessary extra manpower burden on the industries without yielding any additional revenue to the Government.

6. On departmental side also, with the increased workload, the existing backlog position will

further worsen 7. There is a long-standing demand of industry to allow assessees to issue declaration

forms on their own stationery by using computerized stationery. However, this request has not been acceded by the Government.

Our Suggestion In view of the above, we request for immediate withdrawal of the above notification.. Alternatively. Industry should be allowed to print forms on their own computerized stationery for which necessary amendments may be made in CST Rules immediately.

25

ANNEXURE B Procedural

DEFINITION OF INPUTS

In a globally competitive scenario large manufacturers use the services of small scale manufacturers to get a number of their products manufactured, which reduces costs and lead time. However, this creates some complications as under:

• With a view to reduce the cost of product, most of the manufacturers get their products manufactured by SSI/ Ancillary industries. They avail CENVAT of duty paid by such SSI/ancillary unit. They carry quality control tests/ calibrations on these products and pack them, and pay duty on their transaction value to ultimate customers

• The excise authorities seek to deny CENVAT of duty paid by SSI/ancillary units on the ground that testing and packing are not manufacturing processes.

Our Suggestion We request that the definition of ‘Inputs' under CENVAT Credit Rules 2002 may suitably be amended. ITC-HS CLASSIFICATION NUMBER AND DESCRIPTION Time and again IEEMA has been advocating uniform adoption of ITC-HS classification system by Customs, Excise, VAT and DGFT, etc. Since, currently number of products appear under different classification creating confusion leading to misinterpretation rules and corruption. For example, Switchgear products and Switchboards are covered under 85.35, 85.36 and 85.37 as per the ITC-HS classification, whereas description of products under duty drawback, serial no. 85.69 reads “Switchgears, Controlgears, all sorts”. It does not cover all the products described under 85.35, 85.36 and 85.37 Serial/ sub-serial no. mentioned for duty drawback and description of the goods is not the same as per the ITC-HS classification. The discrepancy between ITC-HS classification and description of the goods covered under duty drawback, causes major confusion, resulting in delay in getting duty drawback for exported goods. Our Suggestion We request that suitable amendments be made to the duty drawback schedule to have uniform duty drawback seriol no. as per ITC-HS classification and description of the products

26

ANNEXURE C IEEMA SUGGESTIONS TO THE MINISTRY OF POWER 2006-2007 Based on the inputs received from our members, we enumerate below the issues, which need urgent redressal and request The Ministry of Power to give its kind consideration. EXTENSION OF IMPORT DUTY BENEFITS TO DOMESTIC MANUFACTURERS The Government has extended import duty concessions to the power sector for importing equipment at import duties of 0% to 10% (under Customs Notification No. 21/2002-Cus dated 1.3.2002 as amended from time to time) depending on the type of project / equipment. The details of these concessions are given below for ready reference: Entry No. 400 & 401: Import Duty of 0% for mega power projects Entry No. 424 : Import Duty of 5% for HV Power Transmission projects Entry No. 399 : Import Duty of 10% for power transmission, sub-transmission

and distribution projects However, the domestic manufacturers, who manufacture these equipment in the country, are required to import their raw materials like copper, steel, insulating materials etc. at 10% or more, thereby making the domestic manufacture costlier as compared to imported equipment. IEEMA appreciates that the import duty concessions may be necessary to bring down the cost of equipment and thereby reducing the total cost of the power project. The same result can also be achieved in case of domestic supplies, if the benefit of concessional import duty is extended to raw materials used in the manufacture of equipment required for these projects.

Our Suggestion: IEEMA requests Ministry of Power to recommend to the Government for adding a proviso “raw materials required for manufacture of the equipment required for the above mentioned projects” in the respective entries mentioned above.

27

INCLUSION OF POWER SECTOR UNDER “INFRASTRUTURE FACILITY” - SECTION 80 IA India’s overall growth has been averaging at about 8% since last few years, this could be boosted further if more electricity is made available, since power consumption is being directly linked with GDP growth. The government has provided a number of incentives for promotion of the much needed infrastructure. Benefits under Section 80 IA is one such incentive, which allows deductions to undertaking engaged in infrastructure development, operation and maintenance of certain infrastructure facilities such as roads, toll roads, highways, housing, water supply etc. Benefits under section 80 IA are also available to undertakings, which are engaged in generation, transmission or distribution of power but in a restricted manner since turnkey contractors, who supply, operate or maintain the equipment are not allowed these benefits, as allowed for other infrastructure projects covered under this facility. This is also clear from the Form No. 10 CCB under IT Rules. Further these benefits are only for projects commissioned upto 31- 03-2006. To realize the dream “ELECTRICITY FOR ALL BY 2012 “. The government needs to take a number of steps to boost the power sector reforms and attract investment from more private players. One such step would be extending benefits under Section 80 IA of The Income Tax Act 1961 in full to this critically important sector. Such incentives have made the telecom sector an unqualified success. Our Suggestion Firstly, we propose that, Power Generation and Distribution business should be added to the list of “infrastructure facility”, appearing under INCOME TAX ACT- SECTION 80 IA, so that benefits currently available only to the owners of the projects will also be provided to developers and those engaged in operating and maintaining of such projects both in public and private sector. Secondly, deduction facility under section 80 IA should at least be extended for such projects commissioned till 31st March 2012, keeping in mind the Government of India’s Programme “Electricity for All by year 2012”.

28

INCOME TAX BENEFITS UNDER SECTION 80 IA (COPIES OF THE RELEVANT EXTRACTS OF PROVISIONS) FOR INFRASTRUCTURE PROJECTS As per Section 80IA, the deduction is of an amount equal to 100% of the Profits & Gains derived from the business of

1) developing or 2) operating and maintaining or 3) developing, operating and maintaining any infrastructure facility namely :

(a) a road including toll road, a bridge or a rail system; (b) a highway project including housing or other activities being an integral

part of the highway project; and (c) a water supply project, water treatment system, irrigation project,

sanitation and sewerage system or solid waste management system; (d) a port, airport, inland waterway or inland port;

The deduction is available for any ten consecutive assessment years out of twenty years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility

The above deductions are available to an enterprise carrying on the above business, on fulfillment of certain terms & conditions. FOR GENERATION & DISTRIBUTION BUSINESS Section 80 IA provides benefits to an undertaking who are in the business of:

a) Generation or generation and distribution of power b) Transmission or distribution by laying a network of new transmission or

distribution lines

29

EXCISE DUTY ON PRODUCTS FOR CORE SECTOR

At present the excise duty @ 16% is applicable for the equipment and products required for power generation, transmission and distribution projects. The excise duty on equipment and products increase the cost of the projects. Central or state governments mostly implement these projects and therefore the excise duty is in reality paid by the Government itself. Any reduction in excise duty therefore would reduce cost of the projects, without effective revenue loss to the Government. This will also encourage more investment in private sector and resulting in additional revenue to the government.

Our Suggestion

IEEMA therefore requests Ministry of Power to recommend concessional excise duty at 12% for such equipment and products procured for the power sector projects.

IEEMA feels that these benefits will go a long way in reducing the cost of power projects and in turn the cost of delivered power. There is no effective loss of revenue to the government as the power projects are still mostly in state owned sector and funded by government.

ALLOCATION TO POWER SECTOR The increased allocation to the power sector has seen improved activities in various projects including those under APDRP. Adequate funding for the power sector would help achieving the goal of the government “Electricity for all”.

Our Suggestion

IEEMA therefore requests Ministry of Power to recommend that necessary budget is provided for power generation, transmission and distribution projects as well as for projects under APDRP and AREP.

CONTINUING REFORMS

The power sector reforms have helped the sector to some extent. Continuing power reforms would certainly help in making electricity boards commercially viable and also improving the system, reducing T&D losses and achieving other improvements. Our Suggestion

IEEMA therefore requests Ministry of Power to continue the reforms process and seek necessary budgetary assistance from the Ministry of Finance, if necessary.

30

POWER ELECTRICAL EQUIPMENT INDUSTRY (Soaring Metal Prices have hit the industry hard) PREAMBLE “POWER” is now slowly getting its due recognition as the key infrastructure for economic growth. Power sector in India is poised for development in leaps and bounds for the next 5 to 7 years as the Central Government plans to add a whopping 70,000 MW of generating capacities during this period. This addition will need supporting transmission and distribution network to evacuate this additional power. It is expected that thousands of crores of rupees will be invested in this sector in the next few years. Power equipment industry in India, supplying equipment for power Generation, Transmission and Distribution, is proud to be closely associated with the power sector development. More than 90% of the equipment required for this sector such as; generation, power and distribution transformers, switchgear, cables, conductors, capacitors, transmission line towers, control panels, sub-station accessories, motors, etc. are supplied by Indian Industry. Today, Indian power equipment industry not only can meet the domestic demand, but has also acquired technical capabilities to manufacture world-class products and compete in the world markets. No wonder, many manufacturers are now exporting their products to developing as well as developed countries in Europe and America. Indian power equipment industry is a mix of multinationals, Indian corporates and large number of Small and medium enterprises. Today, this industry is spread across the country and provides direct employment to over half a million. The total size of the industry, including products used in households, is estimated to be between Rs. 85,000/- to 90,000/- cores. RAW MATERIALS AND THEIR PRICES The electrical power equipment use different types of metals as basic raw materials. The metals predominantly used in this equipment are steel in various forms like sheets, angles; copper wires, strips and bars; aluminium and special steel. Apart from these metal products, different types of insulating materials in solid, liquid as well as gaseous forms, which act as insulation between live electrical and magnetic parts are used to provide safety and protection to equipment and human life against electrical shocks. In the overall cost of the electrical power equipment, metals contribute from 60% to 85% depending upon the type of products. For example, in products like motors, transformers, etc. the total contribution of metals is around 60 to 65%, whereas in products like cables and conductors, transmission line towers, etc. the metal contribution can be as high as 85%. The electrical Power equipment industry, therefore, is highly susceptible to the vagaries of metal prices.

31

Historically, the metal prices in India are beyond the control of the electrical power equipment manufacturers. The Government of India controlled prices of the majority of the metals before liberalization of the Indian economy, during those times; the procurement was also channalised through licenses and permission procedures. Prices of metals were also subjected to sudden variations due to policy changes. These uncertainties in metal prices were giving nightmares to the electrical power equipment manufacturers. The situation was more difficult and complex for products where total gestation period (from quotation to actual delivery) was 2 to 3 years. These large gestation periods were on account of delay in decision- making, constraints on availability of financial resources, availability of raw materials, etc. IEEMA, which is the apex Association for power electrical equipment manufacturers, developed innovative mechanism, viz; ‘Price Variation Clauses’ to provide some protection to the industry as well as its customers against such variation in prices of the metals. These PV Clauses for different products were evolved by IEEMA in consultation with the State Electricity Boards, Central Utilities etc. who are major customers of power electrical equipment manufacturers. These PV Clauses are now in operation for about three decades. IEEMA has also established mechanism to review the clauses on regular intervals and make necessary corrections wherever required. IEEMA publishes every month prices of various metals and raw materials, which are constituents of the different PV clauses. Lots of contracts are decided with the IEEMA PV clauses and the final contract prices for all such equipment are automatically adjusted using IEEMA PV clauses and the relevant price indices. IEEMA has been strongly advocating that all manufacturers and their customers incorporate the IEEMA PV clauses while finalizing the contracts since they help in reducing the speculative building. PERCEPTION OF BUYERS The buyers of the equipment have experienced that by incorporating IEEMA PV clauses they are assured of getting offers at reasonable level of prices commensurating with market prices for raw materials at the time of submitting offers. They have also experienced automatic reduction in prices, particularly during the economic liberalization period when the basic metal prices reduced due to reduction in customs duties. IEEMA appreciates the faith shown by the buyers of the equipment in IEEMA PV clauses and wishes thank them for their confidence in IEEMA. IEEMA reiterates that the PV Clause is a mechanism to provide protection not only to the manufacturers, but also to both manufactures and users against the variation in the raw material prices.

32

It must be borne in mind that the IEEMA PV clauses will never compensate fully on account of the variation. However, reasonable level of compensation is assured when the clauses are used. Further, usefulness and effectiveness of PV clauses are always to be viewed on a longer period. IEEMA study on raw material prices During the past 12 or 18 months, electrical power equipment industry is facing a typical problem with regard to the raw material prices. IEEMA, which is collecting regularly prices of various raw materials and circulating the same every month for operation of the IEEMA PV clauses, recently conducted a study on raw material prices, particularly on metals. In the tables 1 and 2 below, prices of few representative metal based products such as; aluminium ingots, steel angles, copper wire rods and CRGO electrical steel sheets are given. For other steel products, a composite index of iron and steel as published by Government of India is included. WHEREAS Table 1 gives monthly prices between the periods 1996 to 2000, Table 2 gives prices of the same raw materials for the period January 2001 to February 2005. From these tables it may be observed that during the period July 2003 to February 2005, aluminium prices increased by 16%, steel prices by around 56%, copper prices by 59% and CRGO steel (used in the manufacture of Transformers) by 46%. These increases in the prices of the raw materials have a tremendous impact on the prices of the electrical power equipment such as transformers, cables, switchgear etc. As a result the prices of these equipment have increased by about 20% to 25% depending from product to product. Availability of the metal products Apart from the rising prices, major problems faced by the electrical power equipment industry are the availability of the metal products. There has been unprecedented demand surge for electrical equipment globally. The demand for this equipment in India and China in particular has gone up substantially. In addition, both India and China, which are the fastest growing economies in the world, are showing sizable growth in the industrial activities. These activities have generated substantial demand, particularly for steel products. (For example capital goods and auto industry). The demand for steel in China is further increased due to its preparation for the Olympic games to be held in Beijing in 2008. In addition to standard sheet metal products, power electrical equipment industry needs a special type of electrical steel, which is basically silicon alloy steel with specific magnetic and electrical properties. This steel is known as Cold Rolled Non-Grain Oriented (CRNO) and Cold Rolled Grain Oriented (CRGO) steel.

33

The CRNO type of steel is used in the manufacture of electrical rotating machines. Few mills in India currently produce this type of steel and they have been able to generally meet the domestic demands. The CRGO type of steel is used mainly in the manufacture of transformers and requires precision and controlled process while manufacturing the same. Quality requirements for this type of steel are also stringent. Therefore, there are very few mills in the world, which are producing this type of steel and exporting the same worldwide. These CRGO steel manufacturers are mainly located in Europe, USA, Japan and Russia. Recently, few mills have been commissioned in Korea and South America. All these mills are also in the business of manufacturing standard steel products like Hot Rolled steel, CRCA etc. The increase in the demand of the standard steel products and their consequent price increase have made manufacture of standards products more lucrative for these steel mills. Manufacture of CRGO, cumbersome and not being lucrative, is therefore not preferred by these mills. This situation has resulted in a severe shortage of supply of CRGO steel and in the present market conditions, some of these mills have stopped offering quotations for the future requirement of CRGO steel. The ‘Catch 22’ situation Power electrical equipment industry in India is therefore in a ‘CATCH-22’ situation. On one hand, the demand for the power electrical equipment industry is going up due to the Government initiatives, thereby creating sufficient business opportunities, on the other hand, manufacturers are not in a position to utilise the opportunity fully as they are unable to commit on deliveries as well as prices. Difficulties faced by the buyers of the equipment Interaction with the Government and the users or buyers of the power electrical equipment, reveal that they are expressing their dissatisfaction on two issues, which are: 1) Manufacturers of power electrical equipment are increasing prices of the

equipment on regular basis taking advantage of the increased demand and it is perceived that in the last two years equipment prices have gone up by 40% to 50%.

2) Manufacturers of power electrical equipment are not supplying equipment as

per the contractual obligations.

34

The peculiar situation arising out of the availability of raw materials as well as increase in their prices during the last 12 to 18 months period, as explained earlier, may partially explain the reasons for some of the manufacturers finding it difficult to honour contractual obligations. The more important issue is however, the perception of the buyers about the increase in prices of the power electrical equipment to the tune of 40 to 50%. It is therefore necessary to bring forward the facts, which explain that the power electrical equipment industry has indeed behaved during this period by not taking advantage of the situation. The following facts will be helpful in understanding the situation and place the issue in right perspective: • Immediately after the liberalization, industrial growth in India started picking up

creating substantial demand for the power electrical equipment. As a result, the industry showed good growth between 1992-93 and 1996-97. During 1996-97, the power electrical equipment industry was at its peak and the prices ruling during that time could be taken as reasonable prices giving comfortable margins.

• During the period 1996-97 to 2000-01, the slowdown in the economy along with setback to the power sector development programme, affected severely the power electrical equipment industry. The industry, during this period of 4 years was reeling under prolonged recession, with demand dropping by more than 30%.

• During 1992-93 and 1996-97 when growth was encouraging, many

manufacturers made new investments and increased their manufacturing capacities to meet the expected increasing demand. Sudden slowdown in the economy, therefore increased competition and the additional capacities pulled down the market prices for the power electrical equipment by about 25% (as compared to 1996-97 levels.

• Thanks to the initiatives of the Government, the market started picking up again

from the year 2001 and since then the power electrical equipment industry is showing positive growth. The IEEMA statistics shows that the production for various types of electrical equipment has gone up by more than 50% as compared to production levels in the year 2000-01. However, as compared to 1996-97, levels the production for most of the equipment is only marginally higher.

• In terms of the effect of raw materials on the actual prices, if IEEMA PV clause is

applied, it is observed that the prices of various equipment have marginally increased by about 1% to 4% during the period 1996-2000 due to increase in the raw material prices. However, the effect of raw material price increase on the prices of equipment during 2001-2004 is about 20% to 25%.

35

Table `3’ given below helps in understanding and getting proper perspective of the events and facts mentioned above:

TABLE - 3 Sr. No.

Event Price of the Equipment

1 The equipment price in the beginning of 1996-97.

Rs.100/-

2 Equipment prices dropped by 20% to 25% by 2000-2001 on account of slump in demand and increased capacity.

Rs.75/- to Rs.80/-

3 Equivalent market price compared to the base price of 1996 after adjusting the price increase on account of raw material price increase of (1% to 4%)

Rs.73.5 to Rs.78.5

4 Increase in market price of about 40%-50% as compared to market price of 2000-2001 due to increase in demand.

Rs.112.5 to Rs.120/-

5 Equivalent price compared to 1996 base after adjusting the increase in cost on account of increase in metal prices (around 20%.

Rs.94/- to Rs.100/-

From the above table, it may be observed that the manufacturers today are still operating at a price, which is lower as compared to the 1996 levels and that the equipment manufacturers are not fully compensated for the increase in the costs on account of increase in the raw material prices. In addition, the globalised environment and liberalized import policy has resulted in increase in the competition, thereby further forcing manufacturers to accept orders at a competitive prices and with stringent techno-commercial conditions. Conclusion & Suggestion: In conclusion, it may be said that even though the demand for power electrical equipment has improved substantially, the equipment industry is facing serious problems on account of availability of raw material and increase in their prices. Due to the increased global competition, margins are under pressure. The customers of power equipment industry (such as state electricity boards and utilities) needs to view this situation in a right perspective and should be more considerate and sympathetic towards the domestic power electrical equipment industry.

36

On behalf of the domestic power electrical equipment industry, it can therefore be urged that the utilities may have to re-look at their old contracts with their suppliers and offer suitable compensation to help the domestic manufacturers fulfill their contractual obligations.

The non-availability of raw materials may be considered as situation beyond the control of manufacturers and appropriate delivery extensions may be granted thereby relieving the power electrical equipment industry from the levy of penalties and liquidation damages.

C:\SHINE\REP\BUDGET\PREBUD-6-7\PRE-BUD.MOP.doc