ASSOCHAM

ISSUES AND SUGGESTION IN DEFENCE SECTOR

ASSOCHAM recommends that a process be created that information regarding the
status of different contracts be shared with the industry in a routine and transparent
manner during various stages RFI & RFP. This allows the industry to manage and plan
their resources in a more efficient manner.
ASSOCHAM recommends that Technical Evaluation Committee should keep all the
stakeholders and concerned vendors informed on a particular evaluation / project
ASSOCHAM recommends that the GOI consider providing an overall tax (including
service tax and VAT)/customs exemption for the prime OEM and its Sub-OEMs, with
regard to Defence procurements. Also, provide specific dispensation to foreign OEMs
from obtaining Importer-Exporter Code (for which tax registration is required) and
registration from VAT / CST (central sales tax) to the extent it would be relevant under
the contract terms. This exemption should be a condition of contract affectivity. This will
provide the Government of India “best for value for money” solutions through more
competitive pricing from the OEMs.
Presently, existing Tax structure creates repressionary cost head and strains financial
competitiveness for the private sector vis-à-vis OEM or DPSU. Non realization of Input
tax present in the private sector manufacturing chain inflates cost and strains the private
sector cost competitiveness
Given the significant devaluation of Indian rupee against some key currencies have
created significant exposure for the private sector over the duration of their contract. In
the absence of any long term currency fluctuation contracts and lack of level playing
field with DPSU (with build in automatic government cover against such losses), we
recommend a mechanism either in the form of a ”currency stabilization fund” created
specifically for hedging such currency losses or specialized long term hedging contracts
from PSU banks enabling private sector to cover the duration of the project
A five Year Acquisition Plan for all three Services should be made available online.
ASSOCHAM recommends doing away with IL requirement for Offset and create specific
List of product - In line with warsernar list (limiting to explosive and lethal product

which could cause harm to masses) which necessarily will require IL, delinking them
from offsets.
ASSOCHAM recommends a quick and speedy mechanism of renewal of licenses.
ASSOCHAM recommends that the current export procedure for Defence Products (a
significant part of which are governed by SCOMET guidelines) should be rationalized
with the population of category 6 of the SCOMET list
ASSOCHAM recommends that the DPP 2011 consider a higher FDI cap of 49%, subject
to approval by DIPP along with an automatic approval route for the 26% FDI limit. This
should allow for a significant degree of control by the Indian Government on the FDI
inflows while encouraging industry to seek meaningful foreign tie-ups.
ASSOCHAM recommends that The OEM should be allowed to modify offset projects,
valuations, and add additional offset partners after offset contract signature with the
concurrence of MOD
The Offset provisions contained in DPP-2011 and subsequent revisions of the DPP
should be retroactive to previous versions of DPP. This will make the defence offset
programs more executable for the foreign vendors and will enhance the benefits of
these programs for the Indian industry and the MoD. Helps provide increased flexibility
in execution within the confines of the DPP
The Offset Period of Performance should be determined independently of the main
contract. Allowing a longer period of time for the offset period of performance beyond
the main contract delivery period will result in enhanced business opportunities for the
Indian Offset Partners facilitated by longer term relationships with the foreign vendors
and their supplier partners.
Banking of Offsets has not yielded desired results because a large number of proposals
are pending without a decision since its introduction. A clause is recommended to be
added in the DPP stating that proposals will be deemed to be accepted by MoD, unless
instructions to the contrary are received by OEMs within three months of submission.
Banked offset credits should be transferrable between the vendor and any of its
subsidiaries, parent, affiliates, or sub-contractors.
ASSOCHAM recommends strengthening and reorganizing of DOFA to address the
impending offset volume. ASSOCHAM also recommends that this reorganization be
communicated to the OEMs and to the Indian industry at large through the MoD website
to avoid any confusion

India’s massive defence budget has the potential to make her a global manufacturing
and services hub in Defence. We must seize this opportunity and put in place a policy
regime that would facilitate investments (foreign and local), transfer of technology (ToT)
and creation of jobs in India.
The SEZ (Special Economic Zone) policy provides the ideal platform for this and
allowing 100% FDI for A&D manufacturing units located in SEZs would provide further
impetus to both indigenization and promoting India as a global hub.