Snapshot of policy initiatives & tax

incentives to market India as an attractive

manufacturing destination
Snapshot of policy initiatives & tax incentives to market India as an attractive manufacturing destination

Snapshot of policy initiatives & tax

incentives to market India as an attractive
manufacturing destination
Overview
• Manufacturing has emerged as one of the
high growth sectors in India targeting global
markets and are becoming formidable global
competitors.
• India has jumped 30 places to reach the 100th
spot in the world bank’s “Doing Business
Report 2017” and has been one of the top
improvers.
• The country is expected to rank amongst the
top three manufacturing destinations by
2020.
• Manufacturing sector is estimated to touch
USD $1 Trillion by 2025 accounting for about
25 - 30% of the country’s GDP, creating up to
90 million jobs domestically.
• The Government of India has set up an
ambitious plan of locally manufacturing
around 181 products. This along with digital
push could be a big catalyst to sectors such as
power, oil & gas, automobile manufacturing.

Further, strong consumerism in the domestic market and sustained availability of high skilled low cost manpower
along with policy incentives from the government of India will boost the manufacturing sector.

Advantages available to Indian manufacturing sector

Skill India - A multi
skill development
Make in India and programme
ease of doing
Subsidies and tax
business initiatives
Infrastructure - incentives
Industrial parks/
Demographic
corridors etc.
advantage

1 2 3 4 5

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 Snapshot of policy initiatives & tax incentives to market India as an attractive manufacturing destination

FDI Policy
• The FDI equity inflow received
after the launch of Make in India
initiative i.e. October, 2014 to
March, 2017 of 30 months is US$
99.72 billion. It shows an increase
of 62% compared to previous
30 months before the launch of
initiative.
• The overall manufacturing sectors
have witnessed a growth of 14% in
comparison to previous 30 months
before launch of Make in India
initiative.
• The FDI equity inflow received
during the financial year 2016-17
is US$ 43.48 billion which is the
highest ever for a particular
financial year.

In India, FDI can be made under

two routes – automatic route (no
Government approval is required) and
approval route (Government approval
is required through Foreign Investment
Promotion Board). The FDI sectoral
caps vary with different sectors/
activities.

For the manufacturing sector, the

permitted limit of FDI varies with each
sub-sector, as listed below.

S.No. Sector Sectoral Cap Route Conditions

1. Manufacturing 100% Automatic Nil
2. Defence - subject to Industrial license 49% Automatic • Above 49% - under Government route
under the Industries (Development on case to case basis, wherever it is
& Regulation) Act, 1951; and likely to result in access to modern
Manufacturing of small arms and and ‘state of art’ technology in the
ammunition under the Arms Act, 1959 country.
• 100% under automatic route
permitted for manufacturing small
arms under the arms act, 1959.
3. Pharma Industry – Greenfield 100% Automatic • FDI up to 100%, under the automatic
route is permitted for manufacturing
4. Pharma Industry - Brownfield 100% Government
of medical devices.
5. Railway Infrastructure 100% Automatic • Subject to sectoral guidelines of
Ministry of Railways

With respect to sub-sectors not listed above, FDI is permissible up to 100% under the automatic route.

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Snapshot of policy initiatives & tax incentives to market India as an attractive manufacturing destination

Key reforms and policy initiatives • Pradhan Mantri Vikas Kaushal Yojana was launched with
a target to skill 10 million people over by 2020.
• Implementation of Goods and Service Tax (“GST”) -
unifying tax rates across the country and thus simplifying • The Government of India has launched a phased
the complex tax structure. By rectifying breaks in the manufacturing programme (PMP) aimed at adding
supply chain and allowing easier flow of input tax credits, more smartphone components under the Make in
GST will substantially eliminate cascading effect of taxes. India initiative thereby giving a push to the domestic
manufacturing of mobile handsets.
• National Manufacturing Policy (“NMP”) - launched way
back in 2011 with the objective of enhancing the share of • The Central Board of Direct Taxes (“CBDT”) has entered
manufacturing in GDP and creating 100 million jobs over into 34 Advance Pricing Agreements (“APA”) in the
a decade or so. The policy is based on the principle of Manufacturing sector avoiding transfer pricing disputes
industrial growth in partnership with the States, provide and providing certainty to the taxpayer by reducing
incentives for infrastructure development on a Public compliance costs and also make tax regime investment
Private Partnership (PPP) basis through appropriate friendly
financing instruments.
• India has concluded Free Trade Agreements (“FTA”) and Key Infrastructure Developments
Preferential Trade Agreements with various countries and
• Industrial Parks: Every state in India has developed
is also negotiating with few other countries in order to
industrial parks for setting up of industries.
eliminate hindrances, allow a free flow of trade between
• National Investment & Manufacturing Zones
countries.
(“NIMZ”): NIMZ is a combination of production
• Pradhan Mantri Mudra Yojna was launched to provide
units, public utilities, logistics, residential areas and
loans to entrepreneurs of small scale business in India.
administrative services. It would have a processing area,
• The Government of India has launched an online portal where manufacturing facilities, along with associated
'eBiz', to provide one-stop clearance platform for logistics and other services and required infrastructure
investment proposals. Single application for a number of will be located, and a non-processing area, to include
permissions, clearances, approvals and registrations will residential, commercial and other social and institutional
be routed automatically across multiple governmental infrastructure.
agencies.
• Special Economic Zones: India has also developed
• The commerce ministry has introduced an annual ranking SEZs that are specifically delineated enclaves treated as
system based on which all the states are ranked on ease foreign territory for the purpose of industrial, service and
of doing business. This move is trade operations, with relaxation in customs duties and
aimed at triggering competition among states to a more liberal regime in respect of other levies, foreign
attract investments, enhancing business climate and also investment.
enabling the investors to make informed decisions.

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 Snapshot of policy initiatives & tax incentives to market India as an attractive manufacturing destination

• Industrial corridors: The Government of India is establishment and relaxation for carry forward of losses
developing the Delhi-Mumbai Industrial Corridor subject to fulfillment of conditions.
(DMIC) as a global manufacturing and investment • Tax holiday benefits to newly established units in Special
destination utilizing the 1,483 km-long, high-capacity Economic Zone (SEZ) for a period upto 15 years subject to
western Dedicated Railway Freight Corridor (DFC) as the fulfillment of certain conditions.
backbone.
• MAT credit carry forward proposed to be extended to 15
• Other four corridors: planned include Bengaluru successive assessments years from existing 10 years.
Mumbai Economic Corridor (BMEC); Amritsar - Kolkata
• An additional depreciation of 20% is available on
Industrial Development Corridor (AKIC); Chennai
new plant & machinery for entities in the business of
Bengaluru Industrial Corridor (CBIC), East Coast Economic
manufacture or production of an article/thing.
Corridor (ECEC) with Chennai Vizag Industrial Corridor as
the first phase of the project (CVIC). • Any manufacturing entity that acquires and installs
new assets exceeding INR. 25 crore on or before March
• 21 new nodal Industrial Cities to be developed. These
2017, is eligible for an investment allowance of 15% of
21 new nodal cities will be having advantages like;
the cost of such assets subject to fulfillment of certain
Large land parcels, Planned communities, ICT enabled
conditions.
infrastructure, Sustainable living, Excellent connectivity-
Road, Rail etc. • For manufacturing units, deduction equal to 30% of
additional wages paid to new regular workmen employed
by the assesse over and above 50 workmen.
Key incentives • Manufacturing entities or entities involved in
• Sector specific initiatives: The government of India biotechnology which incur in-house research expenditure
provides sector specific subsidies for promoting are eligible for claim of twice the sum of expenditure
manufacturing for example in order to boost incurred, subject to approval of Department of Scientific
manufacturing of electronics, the Govt. of India provides and Industrial Research.
capital subsidy of up to 25% for 10 years.
• Area based incentives: Incentives are provided for units
Income Tax issues in manufacturing
in SEZ/NIMZ as specified in respective acts or setting up
project in special areas like North East Region, Jammu & Some of the income tax issues in respect of the Indian
Kashmir, and Himachal Pradesh & Uttarakhand. manufacturing industry has been outlined below:
• Date of set up of business / Treatment of preliminary or
pre-operative expenses;
Tax Benefits under Income Tax • Treatment of interest income earned during setting up of
• Corporate tax rate for domestic companies reduced to business;
25% plus surcharge and cess from AY 2018-19 if turnover
• Tax treatment of subsidy received from the Government;
is less than INR 50 crores in FY 2015-16.
• Allowability of lease premium on long term lease
• Profit linked deductions for an eligible startup for a
arrangements;
period of three years out of the initial five years of
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Snapshot of policy initiatives & tax incentives to market India as an attractive manufacturing destination

• Allowability of additional depreciation; • Stock transfers shall also be treated as supply and be
• Denial of SEZ benefits in few cases, MAT issues and liable to GST. This implies that transfers from factory to
valuation of closing stock; warehouse shall be liable to GST.
• Transfer Pricing challenges - • Subsuming of entry taxes shall reduce the cost of
procurement and time taken to deliver the goods to the
–– Characterisation of the manufacturing operations
purchasers.
–– Denial of adjustments in relation to under-utilisation
• Free Supplies of Goods / Services, i.e., supplies without
of capacity
consideration shall be liable to tax in some specific
–– Compensation for marketing or brand promotion cases.
activity of intangibles such as brandname / trademark
• The concept of centralized registration has been done
owned by associated enterprise (“AE”)
away with. Each location of the entity has to obtain
–– Payment of Royalty & Technical fee for use of know- separate registration under the Act. Significantly impacts
how to AEs those businesses which has a wide supply chain foot
–– Payment of management / administration support print.
charges to AEs • Availing of input credit by the manufacturer shall be
linked to filing of returns by the provider of inputs or
Impact of GST on Manufacturing Sector input service. This might lead to additional hardships
for the manufacturer. This matching concept has been
• It shall eliminate cascading effect of the taxes since various
deferred till March 2018.
central and state levies shall be subsumed into one and
credit shall be available across the supply chain for the • All returns shall be filed electronically giving details of
entire GST paid. However there are some restrictions on every purchase and supply transaction. Further, the
credits of some inputs or input services. The tax incurred number of returns to be filed shall increase considerably
on such inputs/input services would be a cost. under GST regime. The requirement of filing GSTR-2 and
GSTR-3 has been deferred till March 2018.
• Inter-state supplies shall be liable to IGST, which shall
be at the rate combining CGST and SGST. Therefore, a • The concept of ‘Manufacture’ and ‘trading’ under the
higher rate of tax will be incurred when compared to the previous regime has been done away with. This gives
existing rate of CST. However, these procurements shall an opportunity to structure the supply chain and realize
be eligible for input credit, thus reducing the actual cost. strategic benefits.

Concluding thoughts

• The manufacturing industry in India is poised for rapid growth. “Make in India” initiative has led to a
spur in the manufacturing activities.
• It is expected that India with its advantageous geographic location and huge pool of labour
resources clubbed with the slew of measures rolled out by the Government would transform itself
into a “Global manufacturing Hub”. The Indian Government’s message is loud and clear when it
comes to manufacturing, to come and “Make in India” where measures are taken to provide the
investors a conducive environment.

Sources

1. http://www.makeinindia.com 5. http://dipp.nic.in

2. https://www.ibef.org 6. http://www.incometaxindia.gov.in

3. https://www2.deloitte.com 7. https://data.gov.in/

4. http://indiabudget.nic.in

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