With definite signs of slowdown in manufacturing over the last few months, the industry expected some incentives in the Budget. However, the finance minister, as usual, had a challenge to balance growth and fiscal consolidation. The result, again as expected, is a mixed bag.
The excise duty and service tax rate have been increased from 10% to 12%, a decision, which has not gone down too well with the industry. Further, barring certain products like coal, fertilisers, the excise duty has been increased from 1% to 2% in respect of items that were brought under the regime last year. There is a view that this could fuel inflation and negatively impact the manufacturing sector. However, there are few other measures that should bring some relief to the sector.
For instance, support has been extended to select manufacturing operations, in the form of duty reduction on raw materials, inputs, components and capital goods. The basic customs duty on plant and machinery imported for setting up/ substantial expansion of iron ore pellet plants or iron ore beneficiation plants has been reduced from 7.5% to 2.5%. As a step to modernise the textile industry, especially the weaving sector, a full exemption from the basic customs duty has been proposed for automatic shuttle-less looms and automatic silk-reeling and processing machinery, including parts.
Duty benefits have also been extended to manufacturers of branded silver jewellery, battery packs meant for manufacturing of electrical vehicles, LED lamps, readymade garments, etc. Full exemption from the basic customs duty has been extended to LCD and LED TV panels, and parts of memory card for mobile phones. These measures should incentivise the domestic manufacturing in electronic goods industry.
However, sectors, such as cigarettes, auto, jewellery, etc., appear to be at the receiving end, with duty exemptions being withdrawn or the rate being increased beyond 2%.
The relief expected for a liberalized cenvat credit regime for manufacturers and some of the larger issues around credit (such as denial of credit towards construction of factory/ office buildings) remain unaddressed. One notable exception is the facility provided to manufactures for quarterly transfer of unutilised credit of special additional duty (SAD), which would provide a much-needed relief to select industries, from a cash flow perspective.
On the direct tax front, in a bid to augment funds for small and medium enterprises in the manufacturing sector, the Budget has proposed the insertion of a new section in the tax laws, exempting long-term capital gains tax on the sale of residential property by an individual and an HUF, where the sale consideration is re-invested in the equity of a manufacturing SME company for purchase of a new plant and machinery. This is a welcome move to induce investments to the sector.
Further, to provide a boost to the manufacturing sector, plagued by a shortage of skilled manpower, the Budget has proposed a weighted deduction of 150% of the expenses on notified skill-development projects.
The benefit of weighted deduction of 200% on in-house research & development to companies engaged manufacture of production of article or thing was expiring on March 31, 2012.
The Budget brings cheer to the sector by extending this incentive for a further five years till March 31, 2017. This is a welcome move as it would assist in enhancing the global competitiveness of Indian companies by incentivising the R&D spend.