Govt may cut sops to chip units

The Central government is likely to rule out upfront equity participation of 26 per cent in upcoming semiconductor units and other general incentives, including zero interest loans of up to Rs 400 crore and an interest subsidy of 50 per cent for 10 years, in the final draft of the semiconductor policy to be announced in February this year.

The semiconductor industry in India has been eagerly looking forward to the announcement of the semiconductor policy since February 2006, when finance minister P Chidambaran mentioned it in his budget speech.

However, the policy has seen delays due to a stalemate between the finance and IT ministries on the issue of the fiscal incentive package for investors setting up fabrication units.

A senior government official told Business Standard: "We may have a rethink on the incentives comprising equity, subordinate debt, and tax sops, as there is no consensus between the finance ministry and the department of information technology. We are also thinking afresh on whether a blanket incentive of 26 per cent can be given for technology transfer without prioritisation on location."

The revenue department had pointed out that an upfront equity participation of 26 per cent would have a financial implication of around Rs 1,100 crore.

Some of the other general incentives such as zero interest loans of up to Rs 400 crore for five years upfront would cost Rs 200 crore while an interest subsidy of 50 per cent for 10 years would cost another Rs 250 crore.

It had also pointed out that a 100 per cent income tax exemption for 10 years, coupled with exemption on profits ploughed back for the next five years would have a financial implication of around Rs 17,500 crore. Excise duty reductions would also cost the exchequer around Rs 9,000 crore.

The finance ministry had suggested that the investors could choose a mix of incentives that they want for setting up their project in the country, while the overall cost of incentives under any mix was expected to be restricted between 20-25 per cent of the total capital expenditure on the project. It had also thought of incentives, offered by countries like Israel.

Last October, the finance secretary held a meeting on the revised structure of the semiconductor policy and submitted the final contours of the scheme to the cabinet for final approval. But the Prime Minister's Office had directed that incentives under the policy be restricted to just 25 per cent of the total capital expenditure.

As per department of IT's earlier proposal, the incentive package worked out to around 50 per cent of the project cost. The DIT had sought equity infusion of up to 26 per cent of the project cost. It had also sought a loan of Rs 100 crore at zero interest for five years, and Rs 400 crore if the project cost exceeded Rs 4,000 crore.

North Block, on the other hand, was of the view that either no incentives be given or at best, limited to 15 per cent of the project cost at par with the sops given by Israel.

Now the government is of the view that 25 per cent contribution in the capital cost is a huge amount in equity, which can be used for prospecting schemes. It should be area-specific so it is used for development of that area. It is likely to give more benefits to the state receiving more investment.

So there is a possibility that units to be set up in the IT special economic zones (SEZs) in Andhra Pradesh, Karnataka, Tamil Nadu, Maharashtra and others may get income tax and excise duty benefits.