New Semiconductor- Industry Reforms And Policies

By January 19, 2022 No Comments

The Government of India on December 21, 2021, notified the semiconductor policy which was cleared by the cabinet earlier in third week of December 2021.[i] According to the gazette notification, the government will provide up to 50% of project cost for two semiconductor and two display fabs in the country. The application window has started from January 1 and will be open for 45 days. In an attempt to attract large investments for setting up semiconductor wafer fabrication facilities within the country to strengthen the electronics manufacturing ecosystem, the Ministry of Electronics and Information Technology unveiled the scheme for development of semiconductor ecosystem within the country. The said policy push will create a new and alternative semiconductor ecosystem in India.

About the Industry

Semiconductors are material products used in various industries related their conductivity and other characteristics can be altered or modified according to the requirements. The electronic manufacturing sector has seen an unprecedented scope for expansion and growth, especially during the COVID-19 induced lockdown wherein a majority of economic activities shifted online thereby increasing the demand in electronics and auxiliary products and services The global market is valued at approximately INR 150 lakh crore and is expected to grow significantly owing to developments such as artificial intelligence, transferring onto 5G spectrum, robotics, etc. It is estimated that the semiconductor industry has grown at a 17% (CAGR) from INR 1.9 lakh crores in 2015 to INR 4.97 lakh crores in 2021 owing to just 10-30% value addition which is comparatively low to the global leaders in similar industries.[ii]  

New Semiconductor Policy

In continuance of the Indian semiconductor mission and in order to position India as a global hub for electronics system design and manufacturing), the four schemes (Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing,[iii] Production Linked Incentive Scheme (PLI) for IT Hardware,[iv] Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors[v] (SPECS) and Modified Electronics Manufacturing Clusters Scheme (EMC 2.0)[vi])have been introduced by the government of India on December 21, 2021. These schemes are aimed at attracting large investments for setting up different facilities such as compound semiconductor ATMP/OSAT facilities, display fabrication facilities and semiconductor fabrication facilities in order to strengthen the electronic manufacturing ecosystem in India. The schemes provide various incentives to investors and further provide a framework for such investments to be utilised for accelerating competition in the Indian market.

  1. Scheme for setting up to compound semiconductors/ silicon photonics/ sensors fab and semiconductor ATMP/OSAT facilities in India:[vii]

Eligibility Criteria: Companies manufacturing high frequency/ high power/ optoelectronics devices on minimum capital investment of INR. 100 crore and setting up ATMP/ OSAT facilities on minimum capital investments of INR 50 crore.

Fiscal support: Government to provide a fiscal support of 30% of capital expenditure to companies/ joint ventures proposing to set up compound semiconductors/ silicon photonics (siph)/ sensors (including MEMES) FAB in India

Period: Three years.

  • Scheme for setting up of display fabs in India:[viii]

Eligibility Criteria: Companies/ consortia/ joint ventures proposing to set up a display fabrication unit (fab) in india for manufacturing TFT LCD or AMOLED based display panels.[ix]

Fiscal support: upto 50% of project cost and maximum support of INR. 12,000 crore shall be provided by the Government of India whereby appraisal shall be conducted by the Indian semiconductor mission, which shall act as the nodal agency and Ministry of Electronics and Information Technology and state Governments may provide additional financial support.

Period: Fiscal support shall be provided for six years initially, subject to extension

  • Scheme for setting up semiconductor fabs in India:

Eligibility Criteria: Companies/ consortia/ joint ventures proposing to set up a silicon CMOS based semiconductors fab in india for manufacturing logic/ memory/  digital ICs/ analog ICs/ mixed signals ICs/ SoCs

Fiscal support:  On basis on node size (for 28nm or lower à upto 50%; 28nm to 45 nm à upto 40%; 45 nm to 65nm à upto 30%) to on minimum capital investment of INR  20,000 crore[x]

Period: Six years.

  • Design Linked Incentive (DLI) Scheme:[xi]

Eligibility Criteria: Financial incentives and design infrastructure support shall be extended to domestic companies, start-ups and MSMEs engaged in semiconductor design for integrated circuits, chipsets, system on chips (SoCs), system and IP cores linked design under the DLI scheme.

Fiscal support: Reimbursement of 50% of the eligible expenditure subject to a ceiling of INR15 crore incentive per application and reimbursement of 6% – 4% of net sales over 5 years subject to a ceiling of INR 30 Crore incentive per application.

Period: Three years.

FDI Funding in Electronic System Sector

The policies and reforms relating to semiconductors can be classified under electronic systems sector. The global electronic devices market is estimated to be over $ 2 trillion whereby India’s share into the global market has grown from 1.3% to 3.6% and further Indian digital economy is estimated to grow to $ 1 trillion by 2025. India has become one of the largest electronic devices industry producing over 600 units of mobile phones every minute making India the second largest mobile manufacturer in the world.

Under the electronic systems sector 100% foreign direct investment (FDI) is allowed through the automatic route, however, for electronics relating to defence, only 49% FDI is allowed under the automatic route. For investments above 49%, government approvals are required to be taken. The schemes are incorporated to make India a global competitor and hub for electronics system design and manufacturing. Further India has a large consumer base with almost 1.2 billion consumers and has the third largest start-up ecosystem.

Intellectual Property Rights for protecting semiconductor integrated circuits layout-designs

Semiconductors have become an essential commodity since they are being used in almost every electronic goods and hence the development of the layout-design on a semiconductor integrated circuit as an intellectual property has also become very significant.

India being a party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), enacted the Semiconductor Integrated circuits Layout- Design Act, 2000, (“Act”) with the objective of protecting the semiconductor integrated circuits layout-designs.  

Under the said Act “semiconductor integrated circuit” is defined as a product having transistors and other circuitry elements which are inseparably formed on a semiconductor material or an insulating material or inside the semiconductor material and designed to perform an electronic circuitry function.[xii]  A brief summary of the important provisions of the Act is provided hereinbelow:

  1. It provides protection to a layout design,[xiii] which is original and which has not been commercially exploited[xiv] for more than 2 years from the date of application for the registration, which is inherently distinctive and capable of being distinguishable from any other registered layout design.
  2. The application for registration can be filed either alone or jointly and has to be filed within the territorial limit that is a principal place of business in India of the applicant.[xv]
  3. The said registration is valid only for a period of 10 years counted from the date of filing an application for registration or from the date of first commercial exploitation anywhere in country (whichever is earlier).[xvi]
  4. The Act also provides for protection of infringement of layout-design. Any person who commits infringement shall be punishable with imprisonment for a term, which may extend to 3 years, or with fine which shall not be less than INR 50, 0000 but which may extend to INR 10 lakhs, or with both.

The Indian legislation therefore provides a complete protection to the layout designs of the semiconductor integrated circuits as recognized intellectual property and also provides exclusive rights to the proprietor of the registered layout design.

Tax and Semiconductor Policy

Under the Income Tax Act, 1961, (“IT Act”), the tax implications related to semiconductor integrated circuits are covered under Section 35 AD (deduction in respect of expenditure on specified business). As per the said section, an assessee shall be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. Specified businesses under this section includes operating a semiconductor wafer fabrication manufacturing unit. There are certain conditions prescribed under Section 35 AD for claiming deduction for the specified business. The conditions are as follows:

  1. The specified business should not have been set up by splitting up/ reconstruction of the already existing business.
  2. It should not have been set up by the transfer of plant/ machinery which was previously used for other purposes.
  3. In such case when specified business is developing/ maintaining and operating/ developing, managing and operating the new infrastructure facility:
  4. The company should be formed and registered in India, and;
  5. It should have entered into an agreement with the central government/ state government/ local authority/ any other statutory body for developing/ maintaining and operating/ developing, managing and operating the new infrastructure facility.

The amount of deduction available under Section 35AD is summarized as follows:

  1. Capital expenditure incurred prior to commencement of the specified business- 100% of the expenditure is allowed as a deduction in the first year of commencement, (subject to the condition that the deduction is available only if the expenditure amount is capitalized in the books of accounts on the date of commencement of the business
  2. Capital expenditure incurred after the commencement of the specified business- 100% of the expenditure is allowed as a deduction in the year the expenditure is incurred

Besides the above-mentioned provisions of the IT Act, the Income-tax Rules, 1962, states that a semiconductor wafer fabrication manufacturing unit shall be considered for notification only if it fulfils certain conditions such as: the unit shall be exclusively for the manufacture of semiconductor wafer fabrications; it shall have prior approval of the competent authority; the date of commencement of operations of the unit shall be on or after the 1st day of April 2014; it may have one or more manufacturing facilities and all the facilities shall be located in India.

Alpha Rajan Comments

The new schemes will not only further the goals of Aatmanirbhar Bharat and Make in India but will also provide potential investors an opportunity to become a part of the value chain that is being created by the efforts of the government to establish India as the hub for electronics. This will also contribute in cementing the idea of India replacing China as a global destination for electronics manufacturing, designing, research and related services. The initiatives taken by the Indian government in setting up the Indian semiconductor mission will be furthered by this move. Further, the initiatives will help in stabilising the economic conditions which have been affected by the pandemic induced restrictions and the increased demand of electronic products due to shifting of majority of economic activities online.

[i] policy/articleshow/88419299.cms











[xii] Section 2(r) of the Semiconductor Integrated circuits Layout- Design Act, 2000.

[xiii] Layout-design means a layout of transistors and other circuitry elements and includes lead wires connecting such elements and expressed in any manner in a semiconductor integrated circuit.

[xiv] Commercial exploitation, in relation to Semiconductor Integrated Circuits Layout-Design, means to sell, lease, offer or exhibit for sale or otherwise distribute such semiconductor integrated circuit for any commercial purpose.

[xv] Section 8 of the Semiconductor Integrated circuits Layout- Design Act, 2000.

[xvi] Section 15 of the Semiconductor Integrated circuits Layout- Design Act, 2000.

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