Budget Tax News: From tax to sector-specific initiatives, Budget aims to spur manufacturing growth

The manufacturing sector in India is experiencing rapid developments, triggered by the implementation of the “Production Linked Incentives” (PLI) programs (a key pillar of the “Atmanirbhar” initiative). Coupled with measures such as the reduced corporate tax rate for new manufacturing facilities, these are proving to be a turning point for the investment landscape.

These developments demonstrate the government’s intention to bring about a paradigm shift in domestic manufacturing. As the budget drew closer, it sparked curiosity about the additional measures that would be taken to increase and sustain this momentum.

In response to this expectation, the budget for FY2022-23 aims to set the tone for long-term economic development. The measures specific to the manufacturing sector can be roughly divided into three categories, namely: fiscal measures, industry-specific initiatives and other business promoters.

Fiscal Measures

The concessional tax regime for new manufacturing companies requires commercial production to begin by March 31, 2023. In view of the consequences of the pandemic, the extension of this deadline by one year has been widely requested by the industry and is a welcome step.

Several tariff-related changes have been introduced to create a level playing field for domestic producers. For example, in areas such as coal mining, power generation, railways, etc., local actors were on a weaker footing due to project import concessions. These will now be phased out with the introduction of a modest levy, while exceptions for advanced machinery not currently manufactured in India remain in place.

To boost growth in the electronics sector, tariffs on wearables, hearables, etc. are being recalibrated. Although not announced in the budget, a PLI scheme for these devices could also be introduced in the future. Tariff relief on certain electronic items will also be introduced to encourage domestic manufacturing of high-growth electronics. Similar measures are also pending for the chemical industry.

A new law was also announced replacing the Special Economic Zones Act, with increased state involvement in the development of industrial centers. This enables optimal use of the infrastructure and increases competitiveness.

Industry-specific initiatives

To further the PLI initiative, an additional allocation of Rs 19,500 crore for the manufacture of high-efficiency solar panels has been announced. By prioritizing fully integrated production units, the nation is expected to move closer to its renewable energy goals. This also helps align our incentive programs with global political trends.

With a similar focus on creating a resilient 5G ecosystem, a design-bound incentive scheme modeled on PLI is envisaged for the telecom sector.

The government also proposes development in future sectors including artificial intelligence, semiconductors and green energy. These have the potential to lead us towards sustainable development while making the industry more competitive and efficient. Research and development are particularly encouraged in these areas.

Reducing imports in the defense sector was another key issue in the budget, opening up defense research and development to industry, start-ups and academia.

The transition to electric vehicles (EVs) will also be encouraged by clean-tech governance solutions, dedicated mobility zones with fossil fuel-free policies, etc. A battery replacement policy is also proposed to create and enhance the EV ecosystem. This is expected to coincide with the recently completed ACC battery and automotive/auto component PLI programs.

Other business enablers

This budget continues to underscore the continuous improvements being made to enable Easy Doing Business 2.0 (‘EoDB 2.0’).

PM GatiShakti’s reform will strengthen the development of the manufacturing sector by ensuring efficient movement of goods through reduced logistics costs and time, supporting just-in-time inventory management and eliminating documentation.

The scope of Parivesh, a portal for rapid delivery of environmental permits, is now expanding to include multiple permits through a single form, bringing convenience to investors.

Policymakers also recognized the need to maintain the economic momentum that has developed in the wake of the pandemic. Recognizing the role of capital investment here, capital spending increased by 35.4%. Government support for capital investments has also been significantly expanded. The effects of this decision are likely to be felt across the manufacturing sector.

Therefore, the measures put in place in the budget aim to create an ecosystem conducive to long-term growth. Their impact will permeate the value chain and pave the way for “Atmanirbhar” India.

(Bhavesh Thakkar is Partner, EY India. Prutha Pathak, Manager, EY also contributed to the article.)


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