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Semiconductor Revolution: Setting up Semiconductor fabs in India

Semiconductors play a crucial role in modern technology, from enabling cell phones, to electric vehicles, to defence equipment and medical devices. The rising need for Internet of Things (IoT), AI integration, data and wireless communication has sparked increased demand for semiconductors worldwide, the market for which is expected to exceed $1 trillion by 2030 globally. India is taking strategic steps to become a major player in the semiconductor sector and has introduced ambitious schemes and incentive programmes to draw investment into semiconductor manufacturing in India. This article briefly discusses India’s semiconductor policy landscape and explores key considerations in setting up of semiconductor fabs in India.

India’s Semiconductor Policy Landscape

To establish India as a global center for semiconductor design and manufacturing, the Government of India (“GoI”) notified the “Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India” (also known as the “Semicon India Program”) in 2021, at an outlay of INR 76,000 crore. The nodal agency for implementing the Semicon India Program is the Indian Semiconductor Mission, which is a part of the (Indian) Ministry of Electronics and Information Technology (“ISM”). The following schemes have been announced by the GoI under the Semicon India Program:

  • Semiconductor Fab Scheme[1]: This scheme encourages the establishment of semiconductor wafer fabrication facilities in India. The GoI will provide eligible applicants capable of carrying out such significantly capital and resource-intensive projects with fiscal support equal to 50 per cent of the Project Cost[2] on a pari-passu basis.
  • Display Fabs Scheme[3]: This scheme encourages and incentivises the establishment of TFT LCD or AMOLED based display panels manufacturing facilities in India.
  • Compound Semiconductor/ Assembly, Testing, Marking and Packaging (ATMP)/ Outsourced Semiconductor Assembly and Test (OSAT) Scheme[4]: This scheme encourages the establishment of compound semiconductors, silicon photonics (SiPH), sensors (including MEMS) fabs, discrete semiconductor fabs and semiconductor ATMP/ OSAT facilities in India. The GoI will provide suitable applicants, with the technology and ability to carry out such significantly capital and resource-intensive projects, with fiscal support equal to 50 per cent of the Capital Expenditure[5] on a pari-passu basis.
  • Design Linked Incentive (DLI) Scheme[6]: This scheme incentivises design development for integrated circuits (ICs), chipsets, system on chips (SoCs), systems and intellectual property (IP) cores, and other semiconductor linked design and provides design infrastructure support.

Semiconductor fab(s) set up in India will also be supported through purchase preference in procurement of electronic products by the GoI under the Public Procurement (Preference to Make in India) Order 2017.

In addition to the various incentives provided by the GoI under the Semicon India Program, various states such as Gujarat, Karnataka, Uttar Pradesh, Tamil Nadu and Andhra Pradesh have formulated specific policies offering additional fiscal and non-fiscal incentives such as additional capital subsidy, land at concessional rates, power subsidies, water supply support, stamp duty/ tax exemptions, etc., for establishing semiconductor fabs in their respective states. For example, under the Gujarat Semiconductor Policy 2022-27, eligible semiconductor fabrication projects are entitled to: (a) avail 40 per cent additional capital assistance from the Gujarat government on eligible capex assistance provided by the Government of India; (b) one-time reimbursement of 100 per cent of stamp duty and registration fee paid for lease/ sale/ transfer of land for the project; (c) access to water at a subsidised rate for five years, starting from the commercial operation date of the project; (d) 50 per cent subsidy on cost (excluding land cost) of construction of a captive desalination plant built in the initial five years; (e) access to power at subsidised tariff for 10 years starting from the commercial operation date of the project, and (f) exemption from payment of electricity duty. Gujarat also plans to create a single window mechanism for obtaining permits and approvals needed for the project, post-land allocation services and grievance redressal.

Key Considerations In Setting Up A Semiconductor Fab In India

Setting up and operating a semiconductor fab unit in India involves multiple steps, including a capital investment strategy, analysing incentives under various Government policies, including tax benefits, selection of project location, project development, procurement and supply strategy and regulatory compliances.

Capital Investment

Setting up of a semiconductor fab is a capital-intensive process and the cost varies based on technology node and capacity. As discussed above, around 70 per cent of the project cost can be availed as capital subsidy from the Government of India and the relevant state government. For the remaining, the project company may consider putting in its own equity or entering strategic joint ventures/ partnership with Indian companies. Foreign foundries may also explore technology collaboration/ licencing arrangements with Indian companies. Foreign companies are permitted to make 100 per cent foreign direct investment in India for setting up semiconductor manufacturing units, including fabs, OSATs/ ATMPs, under the automatic route (i.e., without GoI’s approval). However, in case the entity or the beneficial owner of any entity is from a country sharing a land border with India (including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan), then any foreign investment into India from such entity will require prior GoI approval.

Project Location

The project company must consider the following factors when selecting project locations for setting up the semiconductor fab:

  • State Government Incentives: A thorough analysis of the fiscal incentives and non-fiscal support offered by various Indian states such as Gujarat, Karnataka, Uttar Pradesh, Tamil Nadu and Andhra Pradesh must be conducted prior to finalising the project location.
  • Infrastructure: Semiconductor fabs require world-class infrastructure, including an uninterrupted high-voltage power supply and access to ultra-pure water availability. There are few locations like Dholera, Gujarat, where dedicated energy infrastructure and water recycling plants are being developed to support semiconductor manufacturing units.
  • Logistics and Connectivity: India is developing local supply chains, but currently, most semiconductor goods and equipment, including advanced machinery, are imported from global suppliers. High speed logistics and connectivity of the project location to airports, ports and highways is critical for importing high-value semiconductor goods and equipment and exporting finished goods. Gujarat, Karnataka, and Tamil Nadu are emerging as semiconductor hubs due to their logistical advantages.
  • Skilled Workforce: A semiconductor fab requires highly specialised talent, including chip design engineers, fab process engineers (cleanroom operations, lithography), material scientists (wafer fabrication, etc.). While states such as Andhra Pradesh, Karnataka, and Tamil Nadu have strong semiconductor design expertise, fab process engineering and cleanroom expertise is still developing. The project company may require expatriate engineers in the initial phases and relocation of technical experts and engineers to the project location.
  • Land Procurement: Following options can be considered for land acquisition for the project:
  • Government-Approved Semiconductor Clusters: The Government of India and state governments have designated regions for semiconductor manufacturing (e.g., Dholera, Gujarat; Bangalore, Karnataka; Sri City, Andhra Pradesh). These locations offer pre-approved infrastructure and utilities.
  • Special Economic Zones (“SEZs”) & Industrial Parks: Many states offer land in Electronics Manufacturing Clusters or SEZs with tax benefits and subsidies. SEZ approvals allow duty-free imports and domestic procurement of capital goods and raw materials used for authorised operation.
  • Private Land Acquisition: If government land is unavailable, companies may also acquire land from private landowners. However, private land acquisition may be a lengthy and costly process.
  • Leasing of Government Land: Many states have industrial development corporations (e.g., GIDC in Gujarat, KIADB in Karnataka, SIPCOT in Tamil Nadu) that allocate/ lease land for these large-scale projects. Some states also offer subsidised land rates, stamp duty waivers, and registration fee exemptions for semiconductor fabs.

Tax Incentives

Project proponents are eligible for various tax benefits, including exemption from basic customs duty (“BCD”) on machinery, electrical equipment, capital goods, other instruments, and their parts used in the fabrication of semiconductor wafers or in the assembly, testing, marking, and packaging (ATMP) of semiconductor chips. Additionally, to promote indigenous manufacturing of semiconductor chips, BCD on the following goods has either been completely exempted or a concessional rate of duty has been provided on import thereof:

  • Specified capital goods and inputs for use in the manufacturing of semiconductors; and
  • Machinery, electrical equipment, other instruments and their parts, except populated printed circuit boards, subject to actual user conditions.

An analysis of products will have to be undertaken on a case-to-case basis for determining exemption, deferment or levy of BCD. It needs to be noted that while concessions from a BCD perspective are available for the above-mentioned products, other taxes such as cess, surcharge or Integrated Goods and Services Tax (“IGST”) may still be levied on import of the products. The IGST paid at the time of import may be available as input tax credit and hence, may not become an additional cost for the project company.

Additionally, the manufacturer can consider various incentive schemes, such as the ‘Export Oriented Unit Scheme’ (“EOU”), which permits duty-free imports, or the ‘Manufacture and Other Operations in Warehouse Scheme’ (“MOOWR”), which allows for deferment of customs duty payments on imported capital goods and raw materials until these items are cleared from the custom-bonded warehouse, and provides a customs duty waiver on finished goods exported from India.

Project Development

Setting up a semiconductor fab in India requires highly specialised engineering, procurement, and a construction (“EPC”) contractor, given the complexity of cleanrooms, ultra-pure water systems, and precision in equipment installation. The project company should carefully select an EPC contractor, with experience in semiconductor/ similar cleanroom projects, ability to handle high-precision mechanical, electrical, and plumbing works and strong project management expertise. Additionally, the contract with the EPC contractor should clearly define the roles and responsibilities, timelines, specifications, compliances and performance metrics for the contractor, including categorical delineation of risks and rewards.

Regulatory Compliances

The project company will also need to obtain and maintain several regulatory approvals and permits, including environmental clearances for the project, land acquisition permits, tax registrations, import/ export licences, labour law registrations, etc., for setting up and operating a semiconductor fab in India. The project company will also need to comply with applicable regulations and guidelines, requirements set out in the fiscal support agreement executed with the Government of India, and requirements prescribed by the relevant state government for provision of fiscal benefits.

Conclusion

With strong government support, increasing investments and demand, and a focus on infrastructure and talent development, India is on track to become a prominent jurisdiction in the global chip manufacturing landscape. While challenges like high capital costs, supply chain dependencies and skill and talent gap remain, by following a strategic, well-planned approach and leveraging Government support, companies can successfully establish their presence in India’s semiconductor ecosystem and play a crucial role in shaping the global semiconductor landscape.

[1] Modified Scheme for setting up of Semiconductor Fabs in India dated October 4, 2022

[2] Project Cost has been defined to include capital expenditure/investment on (a) building, plant and machinery, clean rooms, equipment, and associated utilities; (b) in-house and captive research and development (R&D), technology, intellectual property; (c) transfer of technology (not between joint venture partners); (d) land; (e) interest accumulated during construction; and (f) insurance costs. Such Project Cost will have to be made on or after the date of approval of the project company’s application by ISM and within 6 (six) years therefrom.

[3] Modified Scheme for setting up of Display Fabs in India dated October 4, 2022

[4] Modified scheme for setting up of Compound Semiconductors / Silicon Photonics / Sensors Fab/ Discrete Semiconductors Fab and Semiconductor Assembly, Testing, Marking and Packaging (ATMP)/ Outsourced Semiconductor Assembly and Test (OSAT) facilities in India dated October 4, 2022

[5] Project Cost has been defined to include capital expenditure/investment on (a) building, plant and machinery, clean rooms, equipment, and associated utilities; (b) in-house and captive research and development (R&D), technology, intellectual property; (c) transfer of technology (not between joint venture partners); (d) land; (e) interest accumulated during construction; and (f) insurance costs. Such Project Cost will have to be made on or after the date of approval of the project company’s application by ISM and within 6 (six) years therefrom.

[6] Design Linked Incentive (DLI) Scheme dated December 21, 2022