Component suppliers get a body blow

Raw deal for computer, tractor and textile vendors.

Finance Minister P Chidambram's decision to reduce the excise duty on computers and tractors to zero and abolish Cenvat on powerlooms and handlooms, has caused vendors and component suppliers in these sectors to go up in arms.

While vendors to computer manufacturers complained that the move would lead to "export of jobs" from the country, tractor component suppliers said this would deal a severe blow to outsourcing. Man-made fibre producers said the move could check the industry's growth.

The issue in each case is the same. With zero excise on the end product, the taxes paid by the supplier on parts, components and raw materials, cannot now be set-off downstream.

Computer sub-assemblies and components: Ram Agarwal, managing director of WeP Peripherals, said it would be cheaper to import fully assembled PCs than to assemble locally these here. The weighted import duty on components is the same as on assembled PCs. So there is no incentive to assemble.

"An Indian PC assembler can save 0.5 per cent on costs, as the cost of assembling a PC outside India is 1.5 per cent. The disincentive to assemble will hit motherboard manufacturers badly," he said.

Textiles: Since powerloom and handloom manufacturers are no longer able to claim Cenvat, they are likely to replace man-made fibres, which attracts an excise duty of up to 24 per cent, with cotton, which attracts only 4 per cent.

Powerlooms and handlooms also have the option to opt out of it. This will work against the man-made fibre industry.

"The duty differential between cotton yarn and polyester filament yarn has become 24 per cent now," Indo Rama Synthetics Managing Director OP Lohia said, adding, "Man-made fibre accounts for only 15-20 per cent of our textile exports, as against 60 per cent in the case of China. I don't think it will grow now."

Tractors: Component makers said that as tractor companies could no longer claim Cenvat on excise paid by their suppliers, they would tend to source more products inhouse.

"Inspite of the 16 per cent drop in excise, tractor companies are reducing prices by only 3-4 per cent. If they source more inhouse, they can drop prices more," a Delhi-based component-maker said, adding, "The signals are very scary for outsourcing in the sector."

Companies that produce more components inhouse are likely to benefit more than others from yesterday's announcement.

The Tractor Manufacturers' Association of India (TMA), a body under the Confederation of Indian Industry, is planning to take up the matter with the finance ministry shortly.

"We are asking for more clarification on this issue," RC Jain, TMA president and Eicher Motors group vice-president, said.

On their part, finance ministry sources indicated that the government might waive the excise on sub-assemblies as well. The revenue loss from such a move would be minimal, the sources added.