Reforming the manufacturing sector was one of the highlights of the NDA election manifesto and in his maiden budget, only a month after assuming office, the honourable finance minister has announced a series of measures that could turn India into a key industrial hub. We take a look at key measures for manufacturing that have been described in the Union Budget.
There is no change in the peak customs duty (10%) and excise duty (12%) rates, but with a clear thrust to jumpstart manufacturing the duties have been rationalised on various products that will benefit key sectors like steel, solar and wind power, food processing, electronics, chemicals and petrochemicals.
At the same time, to encourage domestic production of electronics, custom duty rates have been increased on specified telecom products and education cess imposed on all imported electronic products.
The finance minister has indicated that the benefit of reduced excise duty rates for capital goods, consumer durables and automobile sectors, that has been extended for six months, may not be extended beyond December 31, 2014, as these sectors are likely to show recovery by then.
To increase the use of renewable sources such as solar power and wind power, duty concessions have been extended on equipment/ inputs necessary for setting up solar energy projects and the manufacture of wind energy equipment.
The consumer product segment should benefit from the excise duty rate reduction on specified food processing and packaging machinery as well as for the footwear industry.
However, to mobilise resources, excise duty has been increased on cigarettes, pan masala and aerated waters along with a clean energy cess.
A key expectation was the neutralization of the impact of the Supreme Court ruling in the case of an automotive major on excise valuation. The excise valuation rules have now been suitably amended to clarify that at least prospectively excise duty would be payable on "transaction value" even where a manufacturer sells below cost plus profit, in so far as there is no flow back of any additional consideration from the buyer.
From a service tax perspective, there is no change in the rate (12%). However, amendments in service tax have been introduced to rationalize negative list and exemptions. The positive developments include expansion of advance rulings scope to include resident private limited companies and expansion in the scope of the settlement commission. However, mandatory pre-deposits both at the level of commissioner appeals and CESTAT, of 7.5 and 10 per cent respectively, with a ceiling of Rs10 crore, as well as the drastic increase in service tax interest rates from 18 per cent to 30 per cent (depending on the period of delay) are unlikely to be well received by the industry. Other stringent provisions include introduction of maximum time limit of six months to claim Cenvat credit, and the amendment of Cenvat rules to disallow transfer of credit by a large taxpayer (LTU) from one unit to another.
On GST, the roadmap is still elusive, though a strong commitment by the finance minister does provide indication of resolution of key areas of disputes with states and early introduction of GST.
In order to attract investments from SMEs, the investment ceiling for claiming investment allowance has been reduced from Rs100 crore to Rs25 crore. This will result in expansion of the manufacturing sector and at the same time incentivize SME's for the investment made before March 2017.
The benefit of investment-linked tax holiday that allows 100 per cent deduction on capital expenditure (other than expenditure on land, goodwill and financial instrument) is extended for laying and operating slurry pipeline for transportation of iron ore as well as developing and operating semiconductor wafer fabrication manufacturing units if the unit is notified by the board in accordance with prescribed guidelines.
As regards the textile industry, it is proposed to set up a trade facilitation centre and crafts museum to develop and promote handloom products. Six more textile mega-clusters are also proposed to be set up for which Rs200 crore has been allocated.
The budget is a visionary statement that in so far as it lays down a roadmap for the manufacturing sector with the promise of more to come. The measures would promote the "made in India" label and reduce our dependence on import of manufactured consumer as well as industrial goods.
(The writers are tax partners at Ernst & Young, India)