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By Bulbul Singh

05 Sep 06. The Indian government has announced new defence procurement procedures which give a big push to the domestic private sector companies. Under the new procedures domestic private companies have been brought at par with foreign vendors and state-owned defense companies.

The domestic private sector defense companies have been demanding ever since the defense sector was open to private companies in 2001 that they be brought at par with the foreign vendors, and the state owned defense companies so that there is a level playing field.

The new defense procurement procedures, released by the Ministry of Defence on August 22, 2006, titled Defence Procurement Procedures-2006 has brought the domestic foreign companies and the foreign vendors at par by according tax exemptions only for the purpose of quoting bids, so that some tax benefits accorded to foreign vendors are neutralized.

The DPP-2006 has made the following provisions

(a)In case of foreign supplier the basic cost (CIF) quoted by him will be the basis for the purpose of comparison of various tenders.
(b) In case of indigenous supplier, excise duties on fully formed equipment would be offloaded.
(c)Sales tax and other local levies i.e., octroi, entry taxes etc. would be ignored in case of indigenous supplier including Defence (public sector undertakings) PSUs/Ordnance Factories (Offs).
(d)The payment conditions will be similar for domestic private suppliers, defence PSUs/OFs and the foreign suppliers.

Ever since the Indian defense sector was opened to private manufacturers, including foreign equity participation up to a limit of 26 per cent of the equity in a joint venture with an Indian entity, the domestic defense industry has not grown much and exports have languished at around $250m only. The bulk of the defense sales are being met from state owned Public sector undertakings, like Hindustan Aeronautics Limited, HAL; Bharat Electronics Limited (BEL); Bharat Heavy Electrical Limited, BHEL, and the 39 Ordnance factories who account for nearly 85 per cent of the total domestic defence production, while around 40 per cent of the weapons and weapons equipment is imported.

Defense ministry officials here say by bringing at par the domestic private entities and foreign vendors there would be increased participation in joint ventures between foreign defense majors and domestic companies. Apart from this, there is now the mandatory offset clause according introduced last which is estimated to generate around $10bn of offsets for the domestic industry. The private sector defence companies are likely to increase their share in offsets in the years to come said the defence ministry officials, by setting up advanced facilities for weapons and weapons equipment

The Offset Policy for defence procurement was introduced in June, 2005. It stipulates that all contracts over $65.2m must have a minimum offset of 30% and the offset obligation should be discharged concurrently with the main contract.

The defense ministry official said offset policy can be discharged in any of the forms given below: –

(a) Direct purchase of, or executing export orders for, defence products and components manufactures by, or services provided by, Indian defence industries, i.e., Defence Public Sector Undertakings, the Ordnance Factory Board, and any private defence industry manufacturing these products or components under an industrial license granted for such manufacture. For the purpose of defence offset, “services” will mean maintenance, overhaul, upgrade, life extension, engineering, design, testing, defence related software or quality assurance services.

(b)Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development joint ventures and co-production of defence products.


The DPP-2006

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