4 minute read 19 Apr 2021
Production Linked Incentive scheme for the Telecom sector

Can PLI boost domestic manufacturing in the Indian telecom sector?

By Kunal Chaudhary

EY India Indirect Tax Partner

Kunal is a Partner with the Indirect Tax and Global Trade practices in India. He works closely with clients in the Telecom and Technology sectors. He loves cycling and is a cricket enthusiast.

4 minute read 19 Apr 2021

There is a need to incentivize manufacturing in critical sectors, including telecom, to make India competitive in the global market.

Central government introduced the production-linked incentive (PLI) scheme for the telecom sector on 24 February 2021, with the intent to provide a thrust to manufacturing in the telecom and networking products sectors. The scheme was announced last year, where 10 critical sectors were approved post the overwhelming response received for the PLI scheme for electronics sector. The government acknowledges the need to incentivize critical sectors with growth potential to make India globally competitive and remove local disabilities.

At present there is a huge dependence on imports in the telecom sector. The sector is critical for digital transformation and with telecom companies moving towards 5G, innovative products and Internet of Things (IoT) devices, it is important to make telecom equipment available domestically to reduce costs. The scheme proposes to offset the huge import of telecom equipment (worth more than INR 50,000 crores) and reinforce with products made in India, both for the domestic markets as well as for exports. The growth of manufacturing in the country will positively impact employment and utilization of the abundant resource pool that India offers.

This scheme also provides special focus to the Micro, Small and Medium Enterprises (MSME) segment. The scheme will have a total budgetary outlay of INR 12,195 crores and incentives will be provided as below:

PLI Scheme - The Micro, Small and Medium Enterprises (MSME) segment.

Base year under the scheme shall be 2019-20. The applicants with higher investments than specified threshold under MSME and Non MSME categories will be selected through a transparent process.

With the support of the scheme, India is likely to augment its capacities and attract large investments from global players, at the same time encourage promising domestic champion companies to seize the emerging opportunities. The government proposes to generate incremental production of INR 2,00,000 crore over five years and attract an investment of more than INR 3,000 crores. The government envisions India as a global hub for manufacturing of telecom and networking products and create a share for itself in the export market of US$100 billion.

The scheme proposes to incentivize domestic manufacturing of the following products:

  • Core transmission equipment
  • 4G/5G, next-gen RAN and wireless equipment
  • Access and customer premises equipment
  • IoT access devices
  • Other wireless equipment and enterprise equipment such as switches and routers 

The industry is eagerly waiting for the scheme guidelines to understand the critical aspects with respect to the nature of expenses under eligible investment and localization requirements. The telecom industry requires continuous innovation which involves huge R&D costs and it will be interesting to see the nature of expenses being covered under eligible expenditure.

The recent PLI scheme for IT Hardware products provides for a localization schedule where printed circuit boards (PCB) need to be assembled by the applicant from the second year onwards and other specified components need to be either manufactured by the applicant or procured from a domestic third-party service provider. In case a similar condition is introduced under the telecom scheme, the companies may have to re-plan their investment and manufacturing processes as the sector operates on build some-buy some model for its manufacturing, considering highly customizable and low volume products.

It is important that the government expedites release of the guidelines as the benefit under the scheme commenced from 1 April 2021, even as the industry brainstorms the possibilities on offer. The industry would need time in case the existing manufacturing models warrant any change/modification on account of the scheme structure and the same may result in loss of benefit for such period.

Furthermore, the benefit under the scheme provides incentive to finished goods and hence it would be also be important to develop component manufacturing ecosystem in the coming years to support manufacturing. The government had introduced a similar PLI scheme for component manufactures to build local capacities and provide a conducive manufacturing ecosystem which also saw a good response from the Industry. Such scheme should also be introduced again in some time to enable finished goods manufacture to bring in more component manufacture. The success of the same shall realize true intent of the initiative.

There are still open questions which may be answered once the guidelines are out. The industry may be required to take some immediate decisions under the scheme, given the scheme has already started. The government will also ensure approvals and faster disbursals for successful implementation of the policy and to achieve the objectives laid out under the scheme. On the other hand, the industry will have to ensure they fulfil their commitment under the scheme and work diligently towards it.

Summary

Even as the industry brainstorms the possibilities on offer, it is important that the government expedites release of the guidelines and the scheme's benefits.

About this article

By Kunal Chaudhary

EY India Indirect Tax Partner

Kunal is a Partner with the Indirect Tax and Global Trade practices in India. He works closely with clients in the Telecom and Technology sectors. He loves cycling and is a cricket enthusiast.