The 'Make in India' programme was a major initiative that the Modi government had embarked on during 2014. However, the pace of growth in the manufacturing sector over a four year horizon has been unexpectedly slow and extremely volatile.
Budget 2018 presents a great opportunity to catapult the manufacturing sector into a high growth trajectory. Some of the direct tax measures the Finance Minister can consider have been discussed below:
1. Bring back investment allowance and extend upfront deduction of capital expenditure to manufacturers
To encourage investments in the manufacturing sector, the government can consider bringing back the investment allowance deduction. While the 15 % rate can continue, the benefit should be extended to all categories of real assets, including factory buildings. Further, in order to promote investments in the SME sector, the threshold for investments can be reduced to Rs 10 crore per financial year (as against Rs 25 crore earlier).
Currently, 100 per cent of the capital expenditure incurred by taxpayers carrying on certain specified businesses is eligible as a deduction under section 35AD. It would be prudent to extend this benefit to players who are making substantial additional investments (say Rs 250 crore or more) in the manufacturing sector.
2. In-House Research and Development (R&D) expenditure
Investments in R&D is a key catalyst to foster growth in the manufacturing sector. The Government can consider increasing the weighted deduction on in-house R&D from 150% to 200% without a sunset period (the weighted deduction is only available until FY 19-20 currently). The Government can also consider liberalising the conditions (for example: on ownership of IPs), simplifying the process associated with obtaining approvals from DSIR.
3. Weighted deduction on employing additional workmen
Currently, a weighted deduction of 190% (90% spread over three financial years i.e. 30% each year) is available to taxpayers for employing new additional workmen. This comes with several onerous conditions. Some of these conditions include the period for which the employee should be employed during the financial year (240 days), the quantum of salary payable to him (Rs 25,000 per month), etc. Courts have also advocated strict interpretation of these conditions resulting in hardship to genuine players promoting employment generation. The Government should consider (a) substituting 240 days in a financial year with a continuous period of 240 days (b) increasing the cap on salary (c) extending the benefit for new workmen recruited by the transferor company after the Appointed date in the case of business restructurings - eg: a merger, demerger etc.
4. Manufacture of environment friendly products
Globally, significant thrust is made by countries to move into products that are environment friendly. The use of electric/ hybrid vehicles, LED bulbs etc are good examples. The government should consider framing a specific policy to incentivise manufacturers in this sector. Providing a five year tax holiday, upfront deduction on capital investments, weighted deduction on both in-house and outsourced R&D costs are some of the tax aspects that can be considered as part of the said policy.
While the lion is certainly on the move, it remains to be seen whether the saunter would turn into a sprint in the coming days!
Vikram Doshi is Tax Head - South, KPMG in India and Pradeep Narayanan is a chartered accountant