Govt proposes stable duty regime to promote capital goods sector

The government has proposed a long term, stable and rationalised tax and duty structure to promote the capital goods sector, one of the most critical segments for achieving the vision of 'Make in India'.

The National Capital Goods Policy is formulated with the vision to increase the share of capital goods contribution from present 12% to 20% of total manufacturing activity by 2025, said the draft policy released by Department of Heavy Industries.

Stressing on creation of an ecosystem for globally competitive capital goods sector, it proposes uniform customs duty on imports of all capital goods related products.

It also proposes allowing up to 50% CENVAT credit to manufacturers using such products as raw material or intermediates for further processing or using such goods in the manufacturing of finished goods.

It pitches for adoption of uniform Goods and Services Tax regime ensuring effective GST rate across all capital goods sub-sectors competitive with import duty after set-off with a view to ensure level playing field.

The draft makes a case for providing incentives for domestic and global mergers and acquisitions. It also pitches for providing incentives for venture-funding and risk capital to start-up.

Defining the objective of the policy, the paper said the policy is aimed at creating an ecosystem for a globally competitive capital goods sector to achieve total production in excess of Rs 5 lakh crore by 2025 from the current Rs 2.2 lakh crore .

The policy aims to increase domestic employment from the current 15 lakh to at least 50 lakh by 2025 thus providing additional employment to over 35 lakh people.

It is for the first time that a policy on capital goods is being framed and the Department aims to draw up the policy by mid-November, after which it will sent to the Union Cabinet for approval.

"This is the final draft of the policy including comments all stakeholders related to the industry. After the inputs are received, we shall go for final round of consultations. We hope to frame the policy by mid-November," Heavy Industry Secretary Rajan Katoch told PTI.

The last date for sharing comments, suggestions and views on the draft policy is October 31. In May, the initial draft was released.

On availability of industrial financing, the draft pitches for subvention fund for setting up capital goods units and to allow External Commercial Borrowings under automatic route for all capital goods. 

The draft also calls for creating a level-playing field vis- -vis imports by restricting imports of second hand machinery and mitigating duty disadvantages. 

Second-hand import of machinery comprises 15-20% of domestic production and hurts both domestic manufacturers and users in the long run.

India is a net importer of capital goods across sub-sectors. Around Rs 1.22 lakh crore worth of capital goods were imported in to India in 2014-15. Imports have grown at 15% per annum over 5 years, signifying consistent demand in the market but from sources outside India.

The draft policy further envisages increasing exports to 40% of total production (from Rs 62,000 crore to Rs 200,000 crore ) by 2025, enabling India's share of global exports in capital goods to increase to 2.5%.

"The National Capital Goods Policy is a major step to unleash the potential of this promising sector and is envisaged to contribute significantly to achieving the overall vision for manufacturing and 'Make in India' as laid out by the Government of India," said the draft that outlines nine key policy actions.

Other objectives of the policy are to improve skill availability in the capital goods sector by training 50 lakh people by 2025; improve technology depth by increasing research intensity from 0.9% to at least 2.8% of GDP; promote standards to curb inflow of sub-standard capital goods by mandating technical and safety standards and to promote promote growth and build capacity of SMEs to compete with established domestic and international firms.

The draft paper points out that imports continue to address 35 to 40% of domestic demand with the proportion being significantly higher in "critical components" segment for each subsector.

Moreover, it said India's share in global exports in the capital goods sector is still low, ranging between 0.1 and 0.6%, across various sub-sectors. In contrast, share of global exports for China ranges between 7.7 and 16.3% depending on the sub sector.

The paper also sheds light on the large blocks of underutilised capacity, waiting to capitalise on the latent demand in the market.

The paper highlights the fact that support facilities, technology development institutions and skilled man-power continue to lag behind global standards, even as cost disabilities such as higher cost of power, finance and infrastructure lead to higher operating cost.