With the announcement of the much-awaited budget for the fiscal year 2017-18 just around the corner, many economists and experts have set the bar high with their expectations from the NDA Government on laying various reforms in the manufacturing sector.
During the NDA regime, manufacturing has emerged as one of the high focused sectors in India. Amid stagnant global trade, subdued investment and heightened global uncertainty, India continues to be the fastest-growing economy in the world.
Emphasis continues to be on promoting manufacturing in India eg: ‘Make in India’, ‘Start-up India’, ‘Skill India’ etc are the steps in that direction.
While the global growth rate has been projected to 2.7 per cent by the World Bank, India’s GDP growth picked up from 7.2 per cent in 2014-15 to 7.6 per cent in 2015-16.
Even with some deceleration, it is still likely to be around 7 per cent after the effect of demonetisation. While the sudden decline in money supply and a simultaneous increase in bank deposits on account of demonetisation is likely to adversely impact consumption demand in short term.
It is believed that, in the long term, the economy will benefit from the reduction of black money, higher tax collections, less corruption, better business environment, reduction in fiscal deficit, reduction in interest rates
Post demonetisation, Budget 2017-18 is going to be a litmus test for the Government to address the expectations of corporates, small and medium industries and the common man given the cash crunch in the market.
The expectations from investors in form of rebates, benefits and sops are very high. We have summarised few of the expectations from manufacturing sector below:
Accelerating the depreciation – While the Finance Act 2016 restricted accelerated depreciation rate to 40 per cent from 1 April 2017, it is important to consider the need for continuing accelerated depreciation on certain assets not as an incentive but considering quick obsolescence due to rapidly changing technology.
Further, the depreciation available on plant and machinery at the rate of 15 per cent, should be increased to 25 per cent which would enable companies to invest in latest technology to manufacture products of international standards and be competitive in global trade.
Restoring incentives on R&D expenditure – Research is the lifeline of any business anywhere in the world. In order to promote innovation and create a state of art technology in sectors such as defence manufacturing, medical devices manufacturing, automobiles, etc it would be imperative to extend weighted deduction incentive by another 5 years at the same rate. Also, there is need to give the similar benefit to renewable solar industries even on technology development.
Deduction on employment of new employees – As per existing law, the condition for additional deduction for employment of new workmen requires new employees to be employed for at least 240 days in the previous year being the first year of employment.
This leads to a situation wherein an employee if hired on 1 October, will not be able to claim the additional deduction even though such employee may continue to be employed for the entire subsequent year.
This issue should be addressed and additional deduction should be granted if an employee continues to be in employment even in the subsequent year although in 1st year he was employed for less than 240 days.
Deduction of CSR expenses – Presently, while Companies Act makes CSR expenditure mandatory for companies, the Income Tax Act does not permit any deduction of this expenditure.
Considering the fact that the expenditure is mandatory deduction should be permitted for such expenditure incurred. The benefit to the nation is much better when private sector spends on CSR.
Clarity on investment allowance benefits – The Finance Act, 2016 clarified that investment allowance/deduction @ 15 per cent of the cost of new plant and machinery would be available in the year of installation even if such machinery was not acquired during that year.
However, such clarification was only prospective i.e. we 1 April 2016. In order to avoid unnecessary litigation, it would be imperative that such clarificatory amendment is made retrospective i.e. we 1 April 2014.
Clarity on gains on the sale of carbon credits – Currently, there is a lack of clarity as to whether the amount realised on sale of carbon credits is ‘revenue’ receipt or ‘capital’ receipt. Considering the importance of having a cleaner environment, treating it as the non-taxable receipt will encourage more activity in this direction.
Exchange rate difference on acquisition of assets – Presently, the taxpayer is permitted to adjust the cost of acquisition of an asset in respect of exchange difference arising on loan obtained in foreign currency for the acquisition of imported assets only.
However, no such adjustment is permitted in respect of a foreign currency loan utilised for acquisition of assets in India. Foreign exchange loans utilised to acquire new assets from indigenous sources should be treated on par with that utilised for imported assets.
Clarity on conversion of the company into LLP – In respect of exemption of gains arising on conversion of a company into an LLP, the Finance Act, 2016 introduced an additional condition of asset base being lower than INR 5 crores in order to obtain the exemption. It should be clarified that such condition would apply only to conversion proposals initiated on or after 1 April 2016.
Clarity on the deduction under section 80-IA – Section 80-IA provides a deduction of profits earned by taxpayers carrying on specified businesses. Presently, there is the lack of clarity in respect of whether the deduction is available for each unit separately ie without setting off losses of other units or after aggregating profits/ losses of all units together. Necessary clarity will help in reducing the litigation on this issue.
Safe Harbour rule for contract manufacturing – Central Board of Direct Taxes notified safe harbour rules covering sectors like auto component manufacturer, IT/ITES and KPO prescribing margins to avoid litigation. Safe harbour guidelines should be extended for companies manufacturing and exporting products as contract manufacturers for better certainty.
Deduction for infrastructure – World-class infrastructure is the need of the hour in order to ensure the growth of the manufacturing sector. In order to boost development of infrastructure in the country and make it one of the best in the world, it is imperative that some tax incentives should be provided to EPC project companies for development of world-class infrastructure.
The Government launched an inland waterways policy to build a strong network of inland transportation for industries to reduce cost of transportation.
Given that the Government has set an ambitious target of increasing contribution of manufacturing output to 25 per cent of GDP by 2025 from the current 16 per cent, it is extremely important for this sector to be in Government’s focus to provide all such facilities such as proper infrastructure, development of manufacturing zones with world class facilities, etc to be able to compete in global environment.