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Working Group on Capital Goods & Engineering Sector

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1 Working Group on Capital Goods & Engineering Sector
Vision for the sustained growth of Indian Textile Engineering Industry under XIIth Five Year Plan Working Group on Capital Goods & Engineering Sector Sub Group for Textile Engineering Industry August 2011

2 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 3 Annexes

3 This presentation takes into consideration the following aspects:
1 Introduction This presentation takes into consideration the following aspects: Current status 1 2 Goals 3 Critical Factors 4 Strategy Actions Budget & Policies 5 1.1 Base lining of sub-sector Size and growth rates Export & import levels Technology status India’s position in global value chain Other aspects Policy and incentives Sectoral constraints 2.1 Benchmarking with China and other major countries 2.1 Priority segments and target positioning of India in global supply chain 2.2 Target parametres for sub-sector Target size & growth Target export levels Target employment levels Target technologies to be developed Other aspects 3.1 Key success factors to be adopted 3.2 Constraining factors to be addressed 4.1 Strategies to secure target size and growth 4.2 Strategies for import substitution, export enhancement and increasing value addition in India 4.3 Strategies for technology enhancement 4.4 Strategies for job creation and skill development 4.5 Role of Private sector, Government and PSEs 5.1 Action plan for 12th five year manufacturing plan for capital goods Key milestones for 12th plan 5.2 Policies, projects and schemes required 5.3 Budget required to support 12th plan agenda

4 1 Introduction TEI Vision is to grow an internationally competitive industry with technology upgradation, meeting 75% of local demand A strong TEI with a potential to grow, compete, and export Provide strong support to the Indian textile industry to make it vibrant and competitive Acquire technological strength in all sectors, as it is in spinning machinery Aggressive pursuit of FDI to acquire key technologies and R&D Increase market share from existing 50% to 75% to satisfy local demand for textile machinery Capacity scale-up commensurate with increased demand India to become a manufacturing hub for textile machinery, parts/components and accessories, contributing further to employment generation, skill development & GDP

5 TEI – An Overview 1 Introduction
The Textile Engineering Industry (TEI) in India is one of the five key engineering sectors Consists of over 1400 units, with a total investment of Rs.6,900 crores* More than 80% of the units are SMEs* Installed production capacity - Rs crores* and capacity utilization at 75% Provides direct/indirect employment to > 250,000 people* TEI contributes significantly to the competitiveness of the Indian Textile Industry (TI) Meets 50% demand of the Indian textile industry* Source : TMMA / Textiles Committee

6 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 2.1 Current status 2.2 Goals 2.3 Strategy 2.4 Critical factors 3 Annexes

7 Growth trends – TEI (XIth Plan)
2 Current status TEI production grew at a CAGR of 4.21% during XIth Plan due to global recession which adversely affected the textile industry Growth trends – TEI (XIth Plan) Projection Source : TMMA

8 2010 Total Textile Machinery demand [1$=1.28CHF, 1€=1.4$]
2.1 Current status Total world wide demand for textile machinery1 estimated at about 30 bn USD in 2010 2010 Total Textile Machinery demand [1$=1.28CHF, 1€=1.4$] Ginning mn $ = 1% Short staple spinning 5‘200 mn $ = 17% Synthetic 4‘000 mn $ = 14% Jute mn $ = 1% Testing equipment mn $ = 2% ~ 30 bn $ Weaving 3‘300 mn $ = 11% Knitting 3‘500 mn $ = 12% Finishing 3‘200 mn $ = 11% Industrial stitching 4‘000 mn $ = 14% Msc2 5‘000 mn $ = 17% 1 not including spares, consumables and accessories as well as second hand machinery 2 including nonwoven, webforming, longstaple, embroidery, braiding, trimming and other garmenting equipment (cutting, engraving, fusing, quilting, ironing, folding), other synthetic machinery (other than extrusion & texturizing), etc Source: Gherzi

9 2.1 Current status Indian based production of textile machinery is still minor in most segments 2010 – Repartition of major textile machinery producing regions [1$=1.28CHF, 1€=1.4$] Produced in China Produced in India Produced in EU & Japan Not specified (e.g. Brazil. Taiwan, S. Korea, Turkey) Spinning 5.2 bn $ Jute 250 mn $ Weaving 3.3 bn $ Processing 3.2 bn $ 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % Ginning 250 mn $ Synthetics 4 bn $ Testing 550 mn $ Knitting 3.5 bn $ Industrial Stitching 4 bn $ Source: Gherzi

10 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 2.1 Current status 2.2 Goals 2.3 Strategy 2.4 Critical factors 3 Annexes

11 2.2 Goals India has the potential to improve its position (reflecting on market shares) in all segments of TEI: Criteria Ginning Spinning Synthetics Testing Jute Weaving (incl. prep) Knitting Processing Industrial stitching Size of sector (international) bn $ 0.25 5.2 4 0.55 0.25 3.3 3.5 3.5 4 Estimated India market share1 2010/11 [value] 25-30% 8-12% 3-5% 1-3% 10-14% 2-4% 0-1% 3-5% 0-2% Estimated China market share2 2010 [value based] 25-30% 35-45% 30-40% 20-30% 20-30% 40-50% 30-35% 20-30% 20-30% Growth of sector (international) = + + + - + + + + Presence of Indian textile industry high high medium high medium high (but mainly powerlooms) medium medium low Growth of sector (India) + + + + = + + + + Export Opportunities (machinery related) high high medium high medium medium medium high medium Market share Goal (until 2020) for TEI >40% > 20% >10% > 5% >20% >10% > 5% >10% >5% 1 Market share of the textile machinery produced in India Market share of the textile machinery produced in India Source: Gherzi Report

12 Projected Growth trends – TEI (XIIth Plan)
2.2 Goals TEI is projected to grow from Rs 8000 crores to Rs crores during XIIth Plan at CAGR of 15.1% based on commensurate growth of Indian textile industry and expected policy interventions: Projected Growth trends – TEI (XIIth Plan) Source: TMMA

13 Projected employment growth – TEI (XIIth Plan)
2.2 Goals Existing employment (Direct & Indirect) in TEI is expected to grow from 2.85 lakhs to 4.27 lakhs during XIIth Plan however being a capital and technology intensive sector the principal gains will be in value addition & import substitution: Projected employment growth – TEI (XIIth Plan) Source: Textile committee census & TMMA

14 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 2.1 Current status 2.2 Goals 2.3 Strategy 2.4 Critical factors 3 Annexes

15 The Sub group suggests a strategy based on short & long term measures
2.3 Strategy The Sub group suggests a strategy based on short & long term measures 2011/12 2012/13 2013/14 2014/15 1 “Short term measures” (responsibility: GOI / TEI) Encourage FDI on top priority through joint ventures and 100% foreign ownership Establish Technology Upgradation Fund for TEI Discourage import of second hand textile machinery Address fiscal policy constraints and anomalies 2 “Long term measures” (responsibility: GOI / TEI) Sustain FDI in Hi-tech segments Strengthening TEI infrastructure through clusters development and SEZ’s R& D – Institutional capacity building and private sector incentives HRD through vocational training institutes Export promotion

16 Ways to acquire know how / brands
2.3 Strategy Action 1: Encourage FDI for capacity expansion and technology upgradation (1 of 2) Sector Required know how Ways to acquire know how / brands Ginning Indian OEM’s are well positioned, since they have know how regarding all 3 ginning technologies Evaluate a take over of the Continental brand Explore opportunities with Lummus Build up and / or strengthen dedicated R&D cells at universities Spinning Acquire know how related to: High end compact spinning High speed OE High speed winders High speed woolen / worsted frames Air Jet technology Invest in internal R&D Evaluate to work with western Universities (Aachen, Dresden, etc) Winders: Attract investments of Savio, Muratec and Schlafhorst into India as an alternative to China Synthetics Acquire know how related to: Extruders Spinning beams Godets Winders Attract major EU OEM’s (Oerlikon (Barmag, Neumag) to produce / assemble in India (as alternative to China) Contact medium sized EU OEM’s (Swisstex, SML, Sahm, Giudici) in order to explore J&V’s or attract them to assemble / produce in India Jute Acquire know how related to: Opening, Cleaning, Blending Spinning Indian OEM’s should proactively contact the major EU OEM’s (Schlumberger, Gaudino, Bonino, Finlane, etc) in order to explore JV / M&A opportunities Attract EU OEM’s (Schlumberger, Trützschler, Gaudino, Bonino, Finlane) to produce / assemble in India Testing Acquire know how related to: Filament yarn testing (on / offline) Explore M&A or JV activities (e.g. with Sensoptics) on the filament sector Source: Gherzi Report

17 Strategy to attract FDI in know how / brands
2.3 Strategy Action 1: Encourage FDI for capacity expansion and technology upgradation (2 of 2) Sector Area of intervention Strategy to attract FDI in know how / brands Weaving Acquire know how related to: Shuttleless looms (rapier >400 rpm; air jet > 800 rpm; water jet > 800 rpm) Attract FDI (Picanol, ITEMA) regarding air jet, rapier (and ev. Projectile) technology to be produced competitively in India Indian OEM’s should initiate JV / M&A discussions with Panter, SMIT & ITEMA Build up and / or strengthen dedicated R&D cells at universities Knitting Acquire know how related to: High speed circular knitting machinery (Microprocessors) Warp knitting Indian players should evaluate M&A and/or JV’s with EU OEM’s (mainly Italian & German OEM’s) Explore opportunities with Ningbo Yuren (who is expanding fast ) about manufacturing in India Processing Acquire know how related to: Environmentally sustainable processing High speed wide width processing Special purpose processing and finishing machinery (e.g. plasma- finishing) Gherzi foresees also here several opportunities for Indian OEM’s to tie up with or take over EU producers (mainly Italian – there are more than 50 SME’s) Industrial Stitching Acquire know how related to: Hi-tech industrial stitching/sewing machinery (lockstitch, overlock, coverstitch, bar tacking, pocketset, button holes, etc) Attract FDI (e.g. the remaining EU OEM’s: Dürrkop, Pfaff; Necchi)

18 2.3 Strategy Action 1: Encourage FDI for capacity expansion and technology upgradation Investment incentive Today Proposed So far, no local textile machinery enjoys a preferential tariff even for a certain period until their production is stabilized India offers generous tariff protection to pioneer industries such as the automotive industry Even China has been gradually raising tariff on hi- tech items of textile machinery (e.g.,automatic winders) as local capacity increases In order to attract foreign investment to close the gap in the Indian textile machinery value chain for the state of the art manufacture of: Rotor spinning machines Automatic winders Shuttleless looms A preferential tariff, closer to the highest import duty rate of 10% should be considered during at least for first 5 years of production to potential foreign investors, since the market for the above machines is relatively small. The producers of above machines should also enjoy 0% tariff on accessories, parts and components used as inputs

19 Action 2: Address fiscal policy constraints and anomalies
2.3 Strategy Action 2: Address fiscal policy constraints and anomalies Fiscal policy issues Today Today Proposed Proposed Imbalance in customs duty between complete machines at 7.5% (5% on 178 specified items of machinery) and 7.5% for accessories, parts and components (tariff 8448) Shuttleless looms are imported under a concessional customs duty of 5%. There is an infant industry producing shuttleless looms, compact ring spinning frames and automatic cone winding machines for which dedicated components not made in India are imported with a duty of 5% Excise duty ranges between 10% (General items) and 5% (Specific list items) Local suppliers of textile machineries under EPCG scheme face cumbersome procedure for refund of terminal excise duty unlike in EOU scheme enjoying duty exemption 200% weighted deduction on R & D expenditure is allowed only to companies Harmonise customs duty on all types of textile machinery including parts, components and accessories at a uniform rate of 7.5% Reduce customs duty from 5% to nil on 15 imported dedicated parts, components and accessories needed for the production of shuttleless looms, compact ring spinning machines and cone winding machines, this would help to make the local industry more competitive Reduce excise duty from 10% to 8% to improve the competitiveness of local industry Supply of local textile machinery under EPCG and EOU status to be treated at par 200% weighted deduction on R & D expenditure incurred by all companies and partnership / proprietary units

20 Action 3: Discourage import of second hand textile machinery
2.3 Strategy Action 3: Discourage import of second hand textile machinery Second hand machinery Today Proposed Large scale imports of 2nd hand machinery stood at Rs 700 crores in 2009 / 2010 The focus of imports has been the weaving sector Second hand looms are eligible for benefit under TUFS. Advocates of the scheme justify this measure to replace obsolete powerlooms by highly competitively priced second hand shuttleless looms with proven technology The textile machinery industry regards this as a retrograde step which perpetuates the technological obsolescence of the weaving sector in India As per TUFS policy import of second hand looms should satisfy an age criteria whereby the looms should be of maximum 10 years’ vintage. A significant number of second hand imported looms are with old, low speed technology having a weft insertion rate below 750 meters per minutes. It should be noted that China does not allow the import of second hand machines The import of second hand machines should be prohibited or restricted by stipulating a specified minimum residual life of 10 years and further, subject to the condition that the second hand machinery should not be older than 5 years Threshold criteria relating to technical parameters, such as a minimum machine speed may also be imposed This should be certified by a designated authority based in India In any case no incentives, such as TUFS should be applicable to second hand machinery Channelize imports via 2 designated ports Impose “actual user” condition on importers

21 Action 4: Establish Technology Upgradation Fund
2.3 Strategy Action 4: Establish Technology Upgradation Fund Second hand machinery Today Proposed There is no special fund for the textile machinery industry per se. However, the industry only indirectly benefits from the TUFS available to the textile industry. TUFS encourages new investment in the textile industry by providing 5% interest reimbursement and a 20% capital subsidy (credit linked capital subsidy – CLCS) An outlay of Rs. 11,315 crores was earmarked for the TUFS under the 11th Five Year Plan A provision for a Plan outlay of Rs. 750 was made for TEI under the 11th Five Year Plan however no details of utilization were available It’s recommended to launch a TUF dedicated to the Indian textile machinery industry. The fund should have an interest reimbursement outlay of Rs 250 crores for XIIth Plan and based on similar principles as TUFS and cover the following major areas: Expansion and modernization of existing textile machinery manufacturing companies Acquisition of technical knowhow from overseas Industry segments regarded as weak or non existing (rotors spinning, automatic winding, weaving, processing, knitting and industrial sewing equipment) should be eligible for 10% capital subsidy in addition to interest reimbursement

22 2.3 Strategy Action 5: Strengthen TEI infrastructure through cluster development and SEZ Cluster development Today Proposed There are five important clusters where textile engineering units are located – Ahmedabad, Coimbatore, Kolkata, Panipat & Surat 80% of the TEI units are MSMEs There is little institutional support and capacity building is largely at the firm level through private initiative Strengthen existing TEI clusters in five important cities by establishment of five Common Facility Centers (CFC) CFC shall be set up on PPP mode and provide the following services R&D Product development Design facilities Testing facilities Skill development Enterprise management development Encourage establishment of new TEI units under SEZ especially for FDI promotion

23 2.3 Strategy Action 6: R& D – Institutional capacity building and private sector incentives R & D promotion Today Proposed There is low level of R & D in the industry particularly in non spinning areas Limited proprietary technology Resource constraints as 80% of TEI units are MSMEs As majority of TEI caters to the decentralised sector such as weaving and processing with low end applications there is little incentive for R & D Following measures are proposed to foster R & D culture through specific initiatives Focus of R & D shall be at institutional and private firm level, selected textile engineering institutes (IITs and NITs) An apex R & D promotion cell should be set up at TMMA and comprise key stake holders from institutions, private and public sector Capital subsidy up to 50% for viable R & D projects Incentive for innovative design and product development Institutional collaboration between Indian and foreign institutes Inter disciplinary collaboration between TEI and other institutions such as DRDO and automotive industry

24 HRD & skill development
2.3 Strategy Action 7: HRD through vocational training institutes HRD & skill development Today Proposed TMMA collaborated with IIT Bombay for setting up an R&D center for the Indian textile machinery. Spinning and other equipment was provided by TMMA initially. However the initiative has not been effective due to fund constraints and lukewarm government support There is lack of skill development specially in MSMEs Inability of the sector to attract and retain talent Undertake capacity building programmes at textile engineering institutes and vocational institutes Training the trainer Scholarships for students from rural areas and small towns Review of existing curriculum for certificate, diploma and graduate courses Exchange programmes with foreign textile technology institutes such as Aachen University Germany Explore partnership with Swiss Indian chamber of commerce under Swiss government vocational training programme already initiated in other sectors Encourage regular interaction between the industry and academia

25 Export promotion for Indian TEI
2.3 Strategy Action 8: Export promotion Export promotion for Indian TEI Today Proposed Exports represent about 10% of the total TEI production at Rs 650 crores Main products – Spinning, weaving preparations, processing & accessories Main markets – Bangladesh, Malaysia, Far East, Middle East, Africa & Latin America TEI exports enjoy following incentives under generic export promotion scheme DEPB Focus market Exports are monitored by EEPC Encourage project exports through EXIM bank facilities particularly to Africa Undertake market visits and buyer seller meets in less developed textile countries to promote export of textile machinery and spares Easy availability of MDA through EEPC Creation of a new EPC for textile machinery exports to be set up by TMMA through Ministry of Commerce Special assistance for participation in international textile machinery exhibitions

26 Vision for Five Year Plan
2.3 Strategy Textile engineering industry vision & policies: India vs China Vision for Five Year Plan China( ) India( ) To be the No. 1 textile machinery producer in the world by 2015 Current size of the industry(2010): US$ 13 bn of which exports US$1.7 bn(13%) Level of integration : Presence in all segments Share of technical textiles to be increased from 20% (2010) to 25%(2015),with focus on non-wovens Share of man-made fibres in total processed fibres to be increased from 70%(2010) to 76%(2015) with Increase in production of knitted fabrics envisaged Overall, by the end of the 12th Five Year Plan period(2015),key processes, technology and machinery of Chinese textile industry are expected to occupy a leading rank in the world with CAGR of 10% Strong presence of state owned giant enterprises across textile engineering segments To meet 70% of the local demand for textile m/c’s by 2015 Current size of the industry(2010): US$ 1.4 bn of which exports Rs.140 mn(10%) . TEI meets 50% of local demand Level of integration : Current dominant in spinning mainly Industry is cotton dominant(70%) For the textile machinery sector an annual growth target of 15% is envisaged Focus to attract FDI in hi-tech areas to expand capacity and upgrade technology , particularly weaving and processing Industry is private sector driven with 80% MSME ownership

27 2.3 Strategy Textile engineering industry vision & policies : India vs China (1 of 2) Thurst Areas China( ) India( ) Intensifying fundamental research in textiles to play a leading role in proprietary high and new technology core technology in hi-tech fiber development and application advanced textile equipment R&D and manufacturing Catching up with leading level in key processes,technology and equipment; Meeting statutory standards in energy saving and effluent reduction;enabling large scale implementation of clean production and establishing low carbon,green,re-cycling Ensuring that key enterprises(top one-third of above-scale enterprises) with strong capacity in proprietary innovation will have complete technology and product R&D and test centres as well as staff teams of highly qualified professional and innovative employees. R&D expenditure allocation representing 3-5% of revenues is envisaged Modernization of management and production methods Upgrade local capacity in weak areas such as weaving, processing and knitting machinery Forward and lateral integration of missing segments in spinning viz rotor spinning and automatic winding Technology upgradation to improve machine productivity quality and energy efficiency Formulate policies to attract FDI Forge linkages with local and international institutions for R&D Establishment of textile engineering clusters/centres of excellence Removal of fiscal policy constraints Withdrawal on (TUFS) incentive on import of second hand machinery

28 2.3 Strategy Textile engineering industry vision & policies : India vs China (2 of 2) Special Initiative China( ) “50+110” Project India( ) Technological up-gradation of the textile industry by adopting “50+110” project To achieve breakthrough in 50 key technologies for hi-tech new fibres,spinning and weaving,printing and dyeing,high-performance technical fabrics,energy-saving,modern apparels,new textile machinery,IT for textile industry and research on relevant standards To promote application of 110 advanced technologies of high performance,high efficiency and energy saving To encourage innovation and forge linkages between R&D and application,as well as between the enterprises and institutions Notably in 1999 China had launched a major campaign to scrap 10 million obsolete spindles which helped in modernisation of its spinning capacity Textile Up gradation Fund Setting up of three textile engineering clusters FDI Promotion drive

29 Proposed plan allocation for various interventions for TEI
2.3 Strategy Proposed plan allocation for various interventions for TEI Sub group recommends a Plan Outlay for Rs.1800 crores towards various capital budget, cluster development and capacity building programs for the TEI to be undertaken during the 12th Plan period : Description Amount Rs. Cr. Technology upgradation 250 R&D centre(IIT-B) / NITs 150 Existing cluster dev 750 Five CFC’s 500 Business & market dev 50 Skill development Capacity building / Export Promotion Total 1800 Source: TMMA

30 2.3 Strategy In Gherzi view there is a significant long term potential to double TEI production in the XIIth Five Year Plan if bold policy interventions are made Projected Indian production of textile machinery and spares [Rs. Crore] If strategy is not implemented (neither by TEI nor by the Government) If strategy is implemented (by TEI and by the Government) Indian production for domestic demand Indian production for export Strategy to be implemented starting from 2012/13 FDI Acquisition of knowhow Change in policy frame work Foreseen worldwide decline of demand Foreseen worldwide decline of demand Source: Gherzi Report

31 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 2.1 Current status 2.2 Goals 2.3 Strategy 2.4 Critical factors 3 Annexes

32 Critical factors for achieving the goals
2.4 Critical factors Goals* can only be achieved if Indian TEI and the Government work together to overcome the critical factors: Critical factors for achieving the goals 1 People: Not dedicating the right personnel effort to address the issue of lacking know how 2 People: Not improving the capability to understand, absorb and integrate the know how into India Indian OEM related 3 Cash: Lack of CAPEX (e.g. Chinese are actively taking over EU companies / know how) 4 Timing: Not approaching EU companies as fast as possible 5 Fiscal policy issue: Not removing constraints and anomalies 6 Import of second hand machines: Not reviewing policy and not introducing new criteria Government related 7 Incentives: Not considering new incentives for local and foreign investments in areas of identified high technology segments (including capital subsidies in addition to interest re-imbursement)

33 Contents of the document
Vision for the sustained growth of Indian Textile Engineering Industry (TEI) under XIIth Plan Contents of the document 1 Introduction 2 Results 3 Annexes

34 Comparative analysis of India Vs China : Fiscal incentives
3 Annex Comparative analysis of India Vs China : Fiscal incentives 1 China India Today Proposed Preferential tax treatment for Foreign- Invested Enterprises (FIE) Two years of 100 % income tax holiday and 50% income tax reduction for subsequent three years for production- oriented FIE’s from the first year of making a profit Refund of 40% of income tax paid on reinvestment for the purpose of increasing the registered capital of the existing enterprise or establishment of a new enterprise Full refund of income tax paid on reinvestment in China for organization and expansion of an EOU or advanced- technology enterprise Income tax on the royalty received for the supply of technical know-how in scientific research, and the development of important technologies may be levied at the reduced rate of ten per cent There is no policy for differential treatment for FDI enterprises in India however following are the key schemes under which fiscal incentives such as tax exemptions are offered : Special Economic Zones Act 2005 provides following incentives for attracting investments into the SEZs-both local and FDI. Duty free import/domestic procurement of goods for development and maintenance of SEZ 100% exemption on export income for SEZ for first 5 years;50% for next 5 years and thereafter 50% of the ploughed back profits for next 5 years (total 15 years) Exemption from minimum alternate tax External commercial borrowings by SEZ units up to $ 500 million in a year Exemption from CST Exemption from Service Tax Exemption from State Sales Tax and other levies Textile machinery manufactured by an SEZ unit and supplied to a unit in DTA or an EOU or an EPCG license holder should be exempt from customs and excise duty This special provision should be available for a period of 5 years The proposed benefit should be given to identified hi-tech machines (such as rotor spinning machines, automatic winders and shuttle-less weaving machines) Source: Gherzi Report

35 Comparative analysis of India Vs China : Fiscal incentives
3 Annex Comparative analysis of India Vs China : Fiscal incentives 1 China India Today Proposed Preferential tax treatment for FIE EOU’s After the expiration of the normal tax holiday, the FIE’s may pay only 50% tax provided they export 70% of the output However, EOU’s located in an SEZ and economic or technological development zone may pay 10% income tax only Export Oriented Units (EOU) 100% Income tax exemption-10 years 100% FDI permitted through direct route without any special approval No further intervention required Preferential tax treatment for FIE’s which are technology intensive and knowledge intensive A reduced income tax of 15% is applicable to FIE’s which are engaged in manufacture of products listed under “ Catalogue of High and New Technology Products of China” and provided that at least 15% of the company’s sales come from such products . Notably this catalogue includes over 700 such products Special provisions apply only to export oriented Electronics Hardware Technology Parks Consider following incentives for local and foreign investment in areas of identified hi-technology for manufacture of textile machinery: 10 years of tax holiday along the lines of SEZ Policy Exemption from excise and customs duty on capital goods supplied from a textile m/c manufacturer located in SEZ to a textile manufacturer located in DTA Source: Gherzi Report

36 Comparative analysis of India Vs China : Fiscal incentives
3 Annex Comparative analysis of India Vs China : Fiscal incentives 1 China India Today Proposed Preferential tax treatment for enterprises recognized as high or new technology established in the State high or new technology industrial development zones For such companies the applicable benefit is complete tax holiday for first two years of production and thereafter a reduced income tax rate of 15% only No special provisions exist Separately addressed by way of allowing establishment of new hi-tech companies in SEZs Preferential tax treatment for Western regions Income tax on enterprises, domestic and foreign-invested, established in the western regions which are engaged in industries encouraged by the State shall be levied at the reduced rate of fifteen per cent from the year 2001 to 2010,provided that at least 70% of their sales turnover comes from eligible products The domestic and the foreign-invested enterprises established in the western regions and engaged in the encouraged industries are exempt from the tariff and import VAT for the imported equipments for self uses within the total amount of the capital invested India has a policy for industrially backward states which allow tax holidays and other benefits to encourage set up of new industries. These include: Exemption from general sales tax(GST) for 8 years CST at concessional rate of 1% Electricity duty exemption Facilitation in land allotment No further intervention required Source: Gherzi Report

37 Comparative analysis of India Vs China : Fiscal incentives
3 Annex Comparative analysis of India Vs China : Fiscal incentives 1 China India Today Proposed Preferential tax treatment for R&D expenditure 150% of the actual expenditure on R&D may be deducted from taxable income subject to an annual increase in 10% in such expenditure incurred on development of new products, technologies and crafts 200% weighted deduction on R&D expenditure allowed to companies however partnership firm are excluded 200 % weighted average deduction on R&D expenditure by textile engineering companies should be increased allowed to all firms Preferential tax treatment for procurement of locally produced equipment Deduction equal to 40% of the capital expenditure may be claimed from taxable income for the particular year, as an ‘accelerated depreciation’ No special provision No intervention recommended Exemption from import duty and VAT on imported technologies and equipment This is applicable to foreign invested projects listed as encouraged category in the “Catalogue for the Guidance of the Foreign Investment Industries” Duty exemption applicable under EPCG and EOU Scheme. However in case of EPCG supplies, buyers have to apply for a refund of duty or treat under MODVAT scheme which adds to transaction cost Supply of textile m/c from local industry to EPCG and EOU’s should be treated at par as both are ‘deemed exports’ VAT refund for exported textile machinery 17% India has a policy for Duty Entitlement Passbook (DEPB) scheme which is however likely to expire during due non-compliance with WTO Agreement on Subsidies & Countervailing Measures Consider replacement by an alternative mechanism to neutralize the incidence of taxes entering export production Source: Gherzi Report

38 Comparative analysis of India Vs China : Grants and interest subsidy
3 Annex Comparative analysis of India Vs China : Grants and interest subsidy 2 China India Today Proposed Funds for supporting technological innovation by SME’s Science and technology oriented SME’s are eligible for financial appropriation or loan interest discount. In the projects of financial appropriations, the SMEs of science and technology nature receive firstly seventy per cent of the total assisting amount approved to be granted to the enterprises. In the projects of interest discount, the SMEs of science and technology nature receive firstly eighty per cent of the assisting fund for interest discount in accordance with the interest settlement document provided by the enterprises. The rest of the grant or assisting fund for interest discount shall be paid after the projects being completed as well as checked and accepted. Each project shall receive no more than RMB 1 million and in particular cases no more than RMB 2 million For such projects, the government makes an annual budgetary allocation There is no special fund for the textile machinery industry per se. However,the industry only indirectly benefits from the TUFS available to the textile industry. TUFS encourages new investment in the textile industry by providing 5% interest reimbursement and a 20% capital subsidy (credit linked capital subsidy – CLCS) An outlay of Rs. 11,315 crores was earmarked for the TUFS under the 11th Five Year Plan A provision for a Plan outlay of Rs. 750 was made for TEI under the 11th Five Year Plan however no details of utilization were available It’s recommended to launch a Technology Upgradation Fund dedicated to the Indian textile machinery industry. The fund should be based on similar principles as TUFS and cover the following major areas: Expansion and modernization of existing textile machinery manufacturing companies Acquisition of technical knowhow from overseas Industry segments regarded as weak or non existing (rotors spinning, automatic winding, weaving, processing, knitting and industrial sewing equipment) should be eligible for 10% capital subsidy in addition to interest reimbursement Source: Gherzi Report

39 Comparative analysis of India Vs China : Other support measures
3 Annex Comparative analysis of India Vs China : Other support measures 3 China India Today Proposed Brand building – Several state and local governments started a scheme called “Famous Export Brand”, ”China’s Renowned Label” and “China World Top Brand” which were given to promote indigenous brands and were given in the form of grants, preferential funding for R&D projects contingent upon export performance. However China was compelled to withdraw such type of incentive when challenged by the US at WTO Interest rate subvention- This incentive is typically offered by the state and local governments to subsidize loan interest for upgrading technologies and equipment across industries. A project could receive subsidy equal to about one-third of the interest amount in a year Besides above a number of local levies such as land lease fees, VAT and administrative charges may be negotiated with the local industrial park administration As per China Textile Machinery Association(CTMA),the state governments launch and fund special projects for up-gradation of technological standards in the selected textile machinery enterprises in their region. Cross functional projects teams are set up and consist of experts from textile engineering institutes and machine manufacturers and user. They alluded to a project adopted by Zhejiang State government aimed at “increasing the life span of rings by reduction of friction during spinning” TMMA collaborated with IIT Bombay for setting up an R&D center for the Indian textile machinery. Spinning and other equipment was provided by TMMA initially. However the initiative has not been effective due to fund constraints and lukewarm government support To review the policy on import of second hand machinery and withdraw incentive support such as TUFS to send right signals to the industry and prospective investors TMMA has suggested a Plan Outlay for Rs.1800 crores towards various capital budget, cluster development and capacity building programs for the TEI to be undertaken during the 12th Plan period : Rs. Cr Technology upgradation R&D centre(IIT-B) / NITs Existing cluster dev Five CFC’s Business & market dev Skill development Capacity building / Export Promotion 1800 Source: Gherzi Report


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