India to Raise Import Taxes on Luxury Items

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A combination of taxes and FDI polices will drive MNCs to invest in Indian factories

Jul. 23 – India is set to increase import duties on a number of luxury items, including automobiles, televisions, high-end mobile phones, tablets, laptops and exotic foods. As part of a series of strategic tax and FDI initiatives currently being implemented by Finance Minister Chidambaram, the increases are specifically targeted at imported consumer goods that add no manufacturing or FDI value to the country.

“The increases in these strategic items comes at a time when India is, for the first time, coordinating its FDI policy with tax policy,” says Chris Devonshire-Ellis, Managing Partner of Dezan Shira & Associates. “For example, while luxury tax is being imposed on smartphones and tablets, at the same time FDI restrictions in the telecommunications industry are being relaxed. The message is clear: manufacture these products in India for the domestic market or face being priced out through luxury tax. The same is true of autos and other sectors.”

India thus far has a patchy record of matching FDI policy with import duties. However this has now changed, and corporate policy as to accessing the Indian consumer market will have to change along with it.

Automotive

India’s auto market has been suffering the past eight months with sales falling. However, it is the world’s sixth largest auto market and is expected to be the third largest by 2020. Luxury tax increases will mean a 100 percent surcharge on imported autos. The status of the main foreign brand autos in India is summarized below:

Audi
Audi assembles the A4, A6, Q5 and Q7 models at ŠkodaAuto’s plant located at Aurangabad, Maharashtra while the other models are imported from Ingolstadt, Germany.

BMW
BMW has an assembly plant in Chenglepet, Chennai. The plant assembles BMW 3 and 5 series sedans and X1 SUVs while the other available models are imported.

Ford
The American auto giant has just announced plans to make India its global manufacturing hub for small cars. Its “Project B562” will see three different models roll off production lines at its Sanand plant in Gujarat from 2014.

Mercedes-Benz
Mercedes-Benz India manufactures S-series 320 L, E-series E200, E230 and E250 and C-series cars while other variants are imported.

ŠkodaAuto
ŠkodaAuto India’s product range includes the Fabia, Octavia, Laura and Superb models. The Fabia, Octavia and Laura models are assembled at Škoda’s Aurangabad plant, ŠkodaAuto’s first auto assembly plant setup outside of Europe.

Volvo
Volvo imports completely built units from Volvo’s Gothenburg factory in Sweden.

Mobile phones and tablets

India has the world’s fastest growing mobile phone subscriber base and is the second largest mobile subscriber market with some 867 million subscribers after China. Luxury tax on imported items will rise from 1 percent to 6 percent in what is a highly price competitive market. The status of primary international brand sales to India are as follows:

HTC
No manufacturing plant in India – all items are fully imported from Taiwan.

Apple
No manufacturing or assembly plant in India. Fully imported from China.

Samsung
Samsung has a production facility in India located at Noida. However, it has not started production of S4 models in India yet. S4 devices sold in India are imported from South Korea, but the company have announced the S4 will soon be manufactured in India.

Laptops

Lenovo – Market Share: 17%
Running assembly/manufacturing factory in southern Puducherry, India with 3 million units per annum capacity. Had another manufacturing facility at Baddi Himachal Pradesh, but closed down in 2010. Imports laptops and components in India from its manufacturing facilities in China, Japan, Singapore and the United States.

ACER – Market Share: 15.7%
Imports completely built laptops. Acer India has no plans of setting up a full-fledged manufacturing plant in India. It prefers instead to make small modifications on its completely built products in a factory in Pondicherry.

HP – Market Share: 15.5%
HP has an assembly/manufacturing plant in Pantnagar, Uttaranchal with 5.7 million units per annum capacity. Might be importing components (adequate information not available).

Dell – Market Share: 12.4%
Dell opened plants in Penang, Malaysia in 1995, and in Xiamen, China in 1999. These facilities serve the Asian market and assemble 95 percent of Dell notebooks.

They do, however, have a manufacturing unit in Chennai, India. Dell globally sources around 1,300 components worth US$26 billion from China, including components that arrive at the facility in India.

Asus – Market Share: ~5%
Imports from China, Taiwan. Asus does not have its own manufacturing plants. It sources its products from original equipment manufacturers such as Compal and Wintron.

It imports the products from China to its warehouse in Goa, from where it is distributed to retail outlets across India.

Conclusion

Clearly, the sales policy of several MNCs when it comes to their India policy is going to change. Some are well-positioned, others are behind the growth curve. As these suppliers move into the India market – driven by more liberalized equity holdings now available to foreign investors coupled with the incentive to manufacture domestically to avoid luxury tax surcharges – India is now starting to take a leaf out of China’s book into manipulating foreign investment by a combination of encouraging FDI policies and incentivizing tax treatments.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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