4 minute read 14 Jan 2021
Production-linked incentives in  manufacturing sector

How production-linked incentives can help boost India’s manufacturing sector

By Bhavesh Thakkar

EY India Tax and Regulatory Services Partner

Partner in Tax and Regulatory Services practice, Bhavesh focuses on state and central incentives offered in India. He enjoys singing and watching cricket.

4 minute read 14 Jan 2021
Related topics Tax

Multiple policy initiatives announced in the past decade aim to make Indian manufacturing sector more lucrative for investors.

Announced in 2011, the National Manufacturing Policy (NMP) aims at enhancing the manufacturing sector’s contribution to national GDP. In 2014, the Make in India initiative was launched to help attract fresh investments and improve investor perceptions. A key component of these initiatives are the industrial incentives on offer.

Industrial incentives in India follow a partnered approach between the central and state governments. While state incentives are comparatively popular, the central government’s incentives have gained prominence in the recent past. Initially targeted at select sectors, the central government’s incentive schemes offered a capital subsidy/funding assistance equal to a fixed percentage of the investment. For example, the Modified Special Incentives Package Scheme offered investors of the electronics sector a 25% capital subsidy. Similar schemes include the Pradhan Mantri Kisan Sampada Yojana for food processing and the Amended Technology Upgradation Fund Scheme for the textile sector.

While these initiatives aided a fresh inflow of investments, the following needs became apparent:

  • Widening the coverage of central government’s incentives to additional sectors for holistic growth
  • Creation of a large-scale domestic manufacturing ecosystem across priority sectors

In March 2020, the Government of India announced Production-Linked Incentive (PLI) schemes to provide a boost to the manufacturing sector. Considering the vision for each identified sector, these define the eligibility criteria for investors through factors such as investment commitment, capacity creation and/or incremental turnover. Selected investors are offered a recurring cash subsidy computed as a fixed percentage of the manufactured sales turnover, for a specific duration. For instance, the pharmaceutical sector is offered incentives at 5%-20% of sales for 4-6 years.

Operationally, these incentives are administered by the central government through relevant ministries and typically involve the following steps:

  • Online applications by investors detailing their investment proposal
  • Holistic evaluation of proposals by government appointed appraisal agency
  • Selection of investors from the pool of applicants for the grant of incentives
  • Disbursal of incentives on fulfilment of commitments made at the application stage

The computation of incentives and related procedures are simplistic. After approval, selected investors are also allowed time to fulfil their investment commitments. The inbuilt evaluation and continuous monitoring mechanism in the schemes will ensure that performance standards are met. Further, there is certainty around the receipt of incentives given their direct linkage to capacity creation and sales.

The PLI initiative is indicative of the government’s keen focus on scale and growth. Enabling an ecosystem for large scale players may ensure that the same incentives are available to smaller players and that they automatically draw in ancillary units.

The first tranche of PLI schemes was announced for three sectors in March 2020 with a budgetary allocation of approximately US$ 7 billion. A second tranche of PLI schemes for ten additional sectors was announced in November 2020 by the Government of India, with a budget outlay of approximately US$ 20 billion.

  1. Medical devices manufacturing[1]
  2. API/DI/KSMs manufacturing[2]
  3. Electronics manufacturing[3]
Proposed sectors under PLI and approximate budget outlay

Under tranche 1, 16 investments for large scale electronics (worth over US$1.5 billion) were approved, with 215 and 28 applications received for pharmaceuticals and medical devices respectively. Detailed schemes for the second tranche are expected shortly.

Launched under the Atmanirbhar Bharat initiative, this announcement comes at an opportune time when global investors are considering diversifying their manufacturing presence outside China (popularly called the China plus one strategy).

Manufacturers in India are also offered incentives packages by the states, allowing them to recoup approximately 30%-100% of their investment. These usually comprise of:

  • Capital linked incentives with subsidy as a percentage of investment
  • Expenditure linked incentives like power tariff subsidies, stamp duty reimbursement
  • Sales linked incentives like SGST reimbursement, turnover based subsidy

States also offer significant investments (‘mega’ units) customized incentives packages.

Investors can avail incentives from both the Centre and the State simultaneously. The central government also attempts to provide financial relief to industry through measures like duty scrips on foreign trade transactions and reduced corporate tax rates.

Therefore, investors should extensively evaluate and pursue all incentives avenues to benefit from the holistic support intended by the government.

Since the success of these initiatives hinges on their implementation, the government should ensure swift approvals with timely appraisal and disbursal of funds, for all such scheme.

Extension of incentives to encompass service providers and globally relevant areas such as climate change and sustainability will be welcomed as next steps. Ultimately, such end to end support from policy makers might position India as a lucrative global manufacturing destination.

(The article is authored by Bhavesh Thakkar, Partner, Indirect Tax, EY India, with contribution from Prutha Pathak, Manager, Indirect Tax, EY India.)

Summary

Investors should extensively evaluate and pursue all production-linked incentive avenues to benefit from the holistic support intended by the government.

About this article

By Bhavesh Thakkar

EY India Tax and Regulatory Services Partner

Partner in Tax and Regulatory Services practice, Bhavesh focuses on state and central incentives offered in India. He enjoys singing and watching cricket.

Related topics Tax