Even though six months have passed, the year 2020 will go down in history as the period when the world stood still. The COVID-19 pandemic has unsettled economic and social stability across the globe. Stringent lockdown enforced by many countries in the wake of the pandemic has resulted in disruption of economic activity and a sharp decline in consumption. As nations have begun easing lockdown restrictions, emphasis shall now be on treading the long road to recovery.
During the last decade, China emerged as the world’s largest manufacturing hub earning the tag ‘The World’s Factory’. No other country could accomplish what China did through massive reforms spanning over quarter of a century. Nevertheless, considering the widespread disruption caused by the pandemic many multinational corporations have realised the need to expand the geographic spread of their manufacturing facilities and are exploring alternative sites.
This has turned out to be an excellent opportunity for India to induce fresh energy into the ambitious ‘Make in India’ plan. India had rolled out the ‘Make in India’ initiative back in 2014 with the primary goal of becoming a global manufacturing hub. However, the initiative met with tepid response globally. The current sentiment of diversifying manufacturing facilities could be an opportunity for India. Many multinational corporations have expressed interest in exploring India as a destination to set-up their manufacturing facilities.
Comprehending the need of the hour, Prime Minister Narendra Modi recently announced a mega economic stimulus package of Rs 20 lakh crore (US$ 260 billion) for India, termed the ‘Atmanirbhar Bharat’ (Self-reliant India) programme. The government is focusing on creating a favourable ecosystem to emerge as a trusted supply chain partner and evolve as a manufacturing hub.
India has embarked on a journey of reforms to create a conducive environment for foreign investors. We shall now discuss a few reforms brought out by the Government of India, which may act as a catalyst to rejuvenate the ‘Make in India’ plan:
1) Policy announcements
The Hon’ble Finance Minister of India, Nirmala Sitharaman, laid down the details of the economic stimulus package for creating ‘Atmanirbhar Bharat’. One of the announcement is in relation to introduce policy reforms to fast-track investment efforts –
a. Fast track investment clearance through empowered group of secretaries
b. Project Development Cell in each Ministry to prepare investible projects, coordinate with investors and Central/state governments
c. Upgradation of industrial infrastructure
Such a plan should help to eliminate regulatory hindrances, which are always a cause of concern for foreign investors.
2) Manufacturing schemes
Recently, the Hon’ble Union Minister for IT and Telecom, Ravi Shankar Prasad, unveiled three schemes with the aim to strengthen domestic electronics manufacturing. The three schemes are:
a) Production Linked Incentive scheme (PLI)
In order to extend an incentive of 4% to 6% on incremental sales of goods (of specified segments) manufactured in India
b) Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS)
To provide 25% reimbursement on capital expenditure for active and passive components, semiconductors, etc.
c) Modified Electronics Manufacturing Clusters (EMC 2.0)
The objective is to address the disabilities faced by industries, by providing support for creation of world-class infrastructure along with common facilities and amenities, including Ready Built Factory (RBF) sheds / Plug and Play facilities for attracting major global electronics manufacturers along with their supply chain to set up units in the country.
Various stakeholders in the industry have applauded the schemes, as these will facilitate electronics and component manufacturing in India.
3) Land reforms
Acquisition of land has been one of the major hindrances for enterprises considering investing into India. Central and state governments have been focusing on massive land reforms for the benefit of the industry and for the citizens at large.
Media outlets recently reported that India is trying to address such concerns and is developing a land pool nearly double the size of Luxembourg. As per one media report, a total area of 461,589 hectares has been identified across the country for this purpose. That includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh.
If this plan is channelised into appropriate action, it could relieve investors from long standing disputes over land acquisition.
4) Tax reforms
Reduction in Income Tax rate:
Recently, India announced aggressive tax reforms under the Income Tax Law and reduced corporate tax rate category of companies. One prominent announcement is the availability of tax regime as an option under section 115BAB of the Income Tax Act, 1961 that considerably reduces the corporate tax rate to 17.16% (including surcharge and cess). This is available to companies incorporated in India on or after 1 October 2019, subject to certain conditions enumerated in the legislation.
Multinational enterprises planning to set up production facilities in India could consider opting for this tax regime and significantly reduce the effective tax rate on profits. However, various factors are to be considered before exercising the option, with no provision to opt out of the scheme.
Tax on dividend:
In addition to the aforesaid reduction in corporate tax rate, there is a change in the method of levying tax on dividends. The Dividend Distribution Tax, hitherto levied on the companies distributing dividend, has been abolished with effect from 1 April 2020. Accordingly, the recipient shareholder would be liable to pay tax on such dividend income at the applicable rates.
This is a welcome move for many foreign investors who shall now be able to claim benefit of lower tax rate under the Double Taxation Avoidance Agreements entered into by India. In addition, the tax paid in India shall now be available as credit to the shareholder in the residence jurisdiction.
The Government of India is keen to iron out the wrinkles in the existing regulations to make them suitable for foreign investors. The focal point for the coming months would be whether the reforms are enough to attract foreign enterprises to set up shop in India. In order to facilitate a thriving supply chain system, India needs to foster innovation and boost infrastructure to be future ready. We hope that the government is successful in attracting investors to grab a major part of the shifting manufacturing base pie.
(By Ashesh R. Safi, Partner; with Jigar Shah, Senior Manager, and Suraj Nair, Manager with Deloitte Haskins and Sells LLP)