NEW DELHI: Foxconn, the world’s largest contract manufacturer, has flagged its concerns to the government over delays in refunds of about Rs 1,000 crore under the goods and services tax regime, saying one of its key India units has been left cash-starved and this could hurt plans to deepen local production of electronics.
“An inverted duty structure has created working capital issues as some states are lingering on refund by months together and this is severely impacting companies like the Foxconn unit located in Andhra Pradesh, which is left without funds to pay vendors,” a person aware of the development told ET.
Duty structure is considered inverted when components are taxed at a higher rate than the final product. In this case, while mobile handsets are subject to 12% GST, some components are taxed at 18%.
Other contract manufacturers such as Wistron, which makes some iPhone models, Dixon and US-based Flex also face similar issues on refunds, totalling a combined Rs 2,500 crore, said Pankaj Mohindroo, president, Indian Cellular and Electronics Association of India (ICEA).
Foxconn is a member of ICEA, which has written to the government on the issue.
Although the government has taken steps to expedite refunds, they have been delayed at the state level.
Typically under GST, manufacturers can claim credits on taxes paid on various inputs and set them off against their tax liability. Where the tax rate on inputs is higher than that on output supplies – as in the case of the contract manufacturers – refunds can be claimed where input tax credits have accumulated.
“Since Foxconn manufactures and sells a single product, it does not have any avenue to set off excess input tax credits,” the person said. The delay in refunds means the company has to borrow money and is currently paying interest of close to 10% to meet its working capital requirements.
Foxconn declined to comment on ET’s queries on the matter.
The contract manufacturer, which counts China’s Xiaomi and HMD Global (Nokia phones) as its main clients in India, and Apple globally, has been the poster boy for the government’s Make in India initiative. It has set up factories in Sri City in Andhra Pradesh and Sriperumbudur near Chennai to make mobile phones and television panels, respectively. A recent report suggested the company is exploring the manufacture of high-end Apple iPhones in India, besides deepening capabilities to locally produce higher-valued components.
A report that Foxconn founder Terry Gou will visit India shortly has been denied by a person with knowledge of the matter.
According to the Registrar of Companies, while the Foxconn unit has employed total capital to the tune of Rs 1,300 crore, close to Rs 1,000 crore is blocked on account of input tax credits. It imports parts required to make mobile phones.
The situation worsened from April 2018, when imported printed circuit board assemblies started attracting 12% GST while the components needed to make them were subject to 18%, the person said. The situation is such that the greater the value addition, the more funds get locked in as input credit, discouraging companies from adding value. The person said this might force manufacturers like Foxconn to put off plans for higher value addition.
The Taiwanese company has not only sought quicker refunds but, along with other manufacturers, has requested the GST Council to consider elimination of this inverted duty structure.
“This problem has arisen simply out of oversight on the part of the government,” a senior executive at the company said.
The manufacturing industry has now sought credit of 90% of the claims provisionally to ensure that the refunds are processed quickly.
“We have been assisting the CBIC (Central Board of Indirect Taxes and Customs) and the GST Council since July 2017 to streamline various infirmities. This anomaly has also been pointed and should get corrected sooner rather than later. In the meantime, it is taking a terrible toll, especially on EMS (electronics manufacturing services) companies,” Mohindroo said.
Source- Economic Times.