Budget 2016 - what’s in for “Make in India”
Partner, Tax and Regulatory services EY India
Director, Tax, EY India
Senior Manager, Tax, EY India
While global economies are in the midst of serious slowdown and locally within India there being a need to deploy significant resources towards social welfare; the finance minister had a difficult task on hand while presenting the Budget 2016.
Although the Economic Survey charts a growth rate of 7.6%; the Indian economy faces several challenges and expected the Budget to provide a policy boost.
Through the Budget 2015 the Finance Minister had sought to address concerns of foreign investors, bring about tax certainty and reduce litigation and conflicts. The key asks of the Manufacturing segment from Budget 2016 was to provide a positive shift towards implementation of these policy decisions for making India into a Global manufacturing hub and addressing key constraints faced by the economy inter-alia ease of doing business, thrust on education, skill development, infrastructure and land reform.
While delivering the Budget the Finance Minister has appreciated the need for greater impetus in certain areas inter-alia education, skills and job creation, infrastructure and investment, governance and ease of doing business. However, there is not much cheer for the PM’s pet project – Make in India where the tax incentives offered have been negligible.
With an intention to provide impetus to Make in India, new manufacturing companies have been offered a concessional tax rate of 25% on their profits. However, they would not be eligible to claim profit-linked, investment-linked deductions, investment allowances and accelerated depreciation.
The erstwhile tax regime permitted a 30% deduction for new workmen in factories which could be availed only by a manufacturing company. The benefit of the same has been extended to all sectors with the objective to match the growing need for skilled labour and employment generation should increase consumption and provide an indirect boost to the manufacturing sector.
While investors and industry experts, alike, expected and professed the need for enhancing tax sops in the R&D arena, which is vital for manufacturing, the deduction of 2 times of the expenditure has been reduced to 1.5 times and a sunset clause of 31 March 2020 has been proposed for such deduction.
In order to encourage local start-ups and in line with the Start-up India campaign, Budget provides for profit-linked tax deduction of 100% of the profits of a start-up which has commenced operations, upto 31 March 2019 for a period of 3 years in any period of 5 years from such commencement. However, the real benefit could get diluted as startups which generally are in need for cash to meet their growth will be subject to MAT which will restrict liquidity and funds available for growth.
On the indirect tax front, significant changes have been proposed to make India attractive for manufacturing versus importing finished products for sale to Indian customers. Custom duties on components used in the semiconductor industry has been reduced whereas duties on finished electronic goods have been increased to make manufacturing in India viable. Further, in order to facilitate building of manufacturing capacities, import duties on capital goods have been reduced.
Similarly, the provisions relating to reversal of CENVAT credit are simplified and rationalised. Provisions have been made to enable transfer of input services credit to outsourced manufacturers which is a welcome move. Further, refund of service tax paid on services used beyond the factory or any other place or premises of production or manufacture of the goods which are exported outside India has been allowed with retrospective effect.