'India poised to become major defence sourcing hub'

The government should establish a dedicated defence-specific Special Economic Zone (SEZ), apart from tax equalisation subsidy, as fiscal regime played a critical role in the defence market growth, an industry study today said.

It also sought exemption from Research and Development (R&D) Cess for joint ventures implementing the offset obligations under the Defence Procurement Procedure introduced a couple of years ago to energise the defence market.

"The government is urged to consider the establishment of dedicated defence-specific SEZs, establishment of a tax equalisation subsidy linked to value of goods and services supplied to the defence sector, and exemptions to offset joint ventures from R&D Cess," a joint study by industry association CII and audit and advisory firm KPMG released here said.

"The fiscal regime plays a critical role in any defence market in creating an environment that incentivises and supports the long term risk taking, investment and R&D required by the industry," the report said, adding the general view of global defence industry was that India currently has a comparatively aggressive and complex tax regime.

It said with skilled intensive manufacturing capabilities and a world class IT base, India had the "right ingredients to become a key link in the global defence supply chain.

Welcoming the changes made in the DPP-2009 that provided for direct Indian industry participation in Defence tenders on par with public sector undertakings (PSUs), the study also sought new initiatives such as improving visibility of government defence order book, increasing industry output and feedback into the tender process and reduction in bidders' costs.

It, however, noted that the defence procurement policy (DPP) had evolved significantly since its first edition in 2002.

"For India to realise its objectives of building a military capability it requires, the government needs to develop a comprehensive industrialisation strategy for defence," it said noting that the country currently procured about 70 per cent of the armed forces' needs from abroad.

"But India aims to reverse this balance and manufacture 70 per cent or more of its defence equipment in India," it added.

"There is strong support (within industry) for extending the use of offset credit banking, allowing offset credit trading, and introducing the use of multipliers," it said.

The DPP stipulated that any deal for defence equipment with foreign suppliers worth over Rs 300 crore would attract the offset clause under which about 30 per cent to 50 per cent of the contract costs would have to be ploughed back into Indian defence industry.

On foreign direct investment (FDI) cap of 26 per cent, the study said though the opinion was divided on increasing the FDI limit due to security considerations, there was clear expectation from the industry that it would be hiked from the present level.