6 minute read 10 May 2021
PLI scheme - 10 Key Sectors

Production-linked incentive scheme – A key step towards self-reliant India

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.

6 minute read 10 May 2021
Related topics Tax

Government’s production-linked incentive (PLI) scheme has generated interest among domestic and foreign investors alike, owing to the significant budget outlay and incentives promised.

The Government of India announced Production Linked Incentives (PLI) schemes across ten key sectors in November 2020. Similar schemes were announced earlier last year for mobile phones, pharmaceuticals and medical devices, which were appreciated by the industry. Subsequently, key sectors were identified for the grant of similar incentives, i.e., as a percentage of their turnover, upon meeting the specified investment, capacity, turnover criteria and so on.

The announcement has piqued curiosity among domestic and foreign investors alike, owing to the significant budget outlay and incentives.

The National Manufacturing Policy of 2011 paved the way for the Make in India initiative of 2014. While investors continued availing the existing Central and State government incentives, the industrial ecosystem necessitated a focused sector specific approach to incentives, which would catalyze rapid growth and holistic development.

With this backdrop, the PLI schemes are formulated on the following key pillars;

a)  Creation of large-scale manufacturing capacities

Here, the grant of incentives is directly to production capacity/ incremental turnover, compelling investors to create large scale manufacturing facilities. This should lead to improvements in industrial infrastructure, benefiting the industry at large. Thus, its ripples are expected to be felt by manufacturers of all sizes, even if they are not direct recipients of the incentives.

b)  Import substitution and increase in exports

Currently, there is heavy reliance on imports for raw material and finished goods. To illustrate, the electronics industry comprises of several assembly units over manufacturing units.

PLI schemes intend to plug this gap by enabling domestic manufacture of goods. This would trigger a two-fold impact — an immediate reduction in reliance on imports and in the long term, a higher quantum of exports from India.

c)  Employment generation

It is evident that envisaged large-scale require abundant manpower. Hence, this initiative should also enable utilization of the country’s ample human capital.

Therefore, the PLI framework envisages definitive steps toward India becoming self-reliant over the next few years. These hold potential to add US$520 billion worth of manufacturing value to the economy, according to Mr. Amitabh Kant, CEO, NITI Aayog.

PLI framework

In the ensuing paragraphs, we explore the nuances of the sectors covered under the PLI schemes.

  • Automobiles and auto components

This sector accounts for over 7.1%1 of the nation’s GDP. Particularly reeling under the impact of the economic slowdown, this announcement is being welcomed, especially since it has been granted the largest budget outlay for incentives. The scheme will comprise of further sub-schemes aimed at encouraging growth across the ecosystem, i.e., for the component makers as well as the OEMs.

  • Advanced chemical cell batteries

With electric vehicles (EVs) slated to gradually become mainstream, it was only natural that incentives be formulated for battery manufacturers. So far, investors desirous of venturing into this space were hesitant owing to the lack of fiscal support and the slow rate of EV adoption in India. With this announcement, investors have begun firming up their plans. These investments should go hand in hand with EV adoption over the next ten years, while also reducing the dependence on imports. The scheme is largely targeted at large players.

  • Pharmaceuticals

This is the second scheme for the sector. The first round focused on the manufacture of critical drugs, while the coverage has been extended to various categories of pharmaceutical products now. Previously, applicants were chosen on the basis of their proposed manufacturing capacity and selling price. The base for eligibility has now been changed to global manufacturing revenue. A special sub-group will also be created for MSME units.

  • Food processing

Despite being the world’s largest producer of some agricultural commodities, the food processing sector in India is still in nascent stages. The benefits accruing from the PLI scheme are expected to cascade to the farmers and help harness the massive employment generation potential in the sector.

  • Specialty steel

This is a niche sector, which was hitherto not given large incentives. The scheme should help the nation build manufacturing capacities in certain grades of steel which are currently imported. Overall, it is also expected to lead to an increase in total exports.

  • Solar photovoltaic modules

Despite its tremendous potential, the lack of financial and policy incentives in this sector has long impacted its growth, creating a greater reliance on imports. While this scheme may benefit only a handful of players, it is certainly expected to amplify the manufacturing capacity.

  • White goods (air conditioners and LED lights)

Largely centered around encouraging full-fledged manufacture in India, as opposed to assembly units, these schemes should contribute to the establishment of a global supply chain footprint in India

  • Telecom

The scheme aims to offset the huge import of telecom equipment. The incentives are likely to go up to 20 times the minimum investment threshold. Recognizing the need for additional support to MSME units, it allows them additional incentives in the initial years. This scheme would aid the ongoing focus towards digital transformation.

  • Textiles

This scheme aims to shift the production from natural fibers to man-made fibers and technical textiles. This would aid alignment of the sector to global consumption patterns.

As indicated in our previous article on PLI, investors are chosen for PLI based on a detailed evaluation of their proposals submitted online. Once approved, they are granted incentives on fulfilling the commitments. The schemes have an inbuilt evaluation and monitoring mechanism to ensure performance standards are met. Their simplistic structure and transparent design should lead to swift processing and appraisals.

With the launch of PLI, investors are likely to take a keen view of the incentives across other nations and factor them into the investment decision.

In China, incentives are provided through reduced corporate tax rates, tax deductions and tax holidays. Additionally, local governments offer cash grants, concessional buildings, tax credits and loan subsidies on a discretionary basis. Other South East Asian nations such as Vietnam, Indonesia and Philippines offer long term tax holidays and reduced corporate tax rates.

Unlike this approach, the India PLI schemes are designed on a direct correlation between the incentives and upscaling of manufacturing capacities, which is at the core of this initiative. Through PLI, the policymakers have adopted a sharp, structured approach to incentives, thus making it attractive to investors. This is expected to continue and yield clear results in the foreseeable future. The coverage may also be extended to additional sectors soon.

Additionally, several other pro-manufacturing initiatives have been taken such as:

  • Announcement of competitive 17% corporate tax rate for new manufacturing investments
  • Re-evaluation of 400 customs duty exemptions and concessions
  • Announcement of Manufacturing and Other Operations in Warehouse Regulations (MOOWR), which enables considerable duty savings
  • Rapid transformative changes to the state level incentives policies across India

Therefore, several avenues for increased savings are offered to investors. An extensive evaluation would be critical in ensuring all available benefits are pursued.

(Prutha Pathak, Manager, Indirect Tax, EY India has also contributed to this article).

Summary

The momentum generated by these initiatives should trigger the creation of a dynamic business ecosystem. Consequently, it is expected to yield long term economic benefits. Such measures should pave the way for India to become a preferred investment destination and emerge as a viable alternative ahead of its competitors.

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