Draft Policies on Telecom, Electronics and Information Technology: Some Issues

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The Ministry of Communications and Information Technology released three draft policies on telecommunications, information technology and electronics.  The Ministry has invited comments on the draft policies, which may be sent to epolicy2011@mit.gov.in. These policies have the common goal of increasing revenues and increasing global market share.  However, the policies may be incompatible with the Direct Taxes Code Bill, 2010 (DTC) and India’s international obligations under the General Agreement on Tariff and Trade (GATT).  Below we discuss these policies within the scope of the GATT and the DTC. The draft National Information Technology Policy, 2011 aims to formulate a fiscal structure to attract investment in the IT industry in tier II and III cities.  It also seeks to prepare SMEs for a competitive environment by providing fiscal benefits.  Similarly, the draft National Electronics Policy provides for fiscal incentives in manufacturing on account of infrastructure gaps relating to power, transportation etc. and to mitigate the relatively high cost of finance.  The draft policy also provides preferential market access for domestically manufactured or designed electronic products including mobile devices and SIM cards.  The draft National Telecom Policy seeks to provide fiscal incentives required by indigenous manufacturers of telecom products and R&D institutions.

The theme of the DTC was to remove distortions arising from incentives.  The detailed note annexed to the Bill states that “tax incentives are inefficient, distorting, iniquitous, impose greater compliance burden on the tax payer and on the administration, result in loss of revenue, create special interest groups, add to the complexity of the tax laws, and encourage tax avoidance and rent seeking behaviour.”  It further notes that the Parliamentary Standing Committee on finance had recommended removal of exemptions other than in exceptional cases.  As per the Department of Revenue, tax holidays should only be given in businesses with extremely high risks, lumpy investments and lengthy gestation periods.  The DTC also removes location-based incentives as these “lead to diversion of resources to areas where there is no comparative advantage”.  These also lead to tax evasion and avoidance, and huge administrative costs.  The proposals to provide fiscal incentives in all three draft policies contradict the direction of the direct tax reforms. Article 3 of GATT provides that foreign products should be accorded the same treatment accorded to similar domestic products in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution and use.  The provisions in the draft electronics policy to secure preferential market access to products manufactured in India may contravene this Article. In granting such fiscal and trade incentives, the policies may be contrary to the approach adopted in the DTC and India’s obligations under the GATT.  These draft policies will have to be reconciled with tax reforms and trade obligations.