The finance minister is prepping for the most anticipated budget of the Modi government. Unlike the first budget in July last year, which was primarily viewed as a barometer of the new government’s intentions, this year’s would be keenly awaited to showcase the measures to revive the economy, promote investment in manufacturing and improve the global competiveness of the country.

The focus of the budget will be to propel the Make-in-India campaign of the government. This would require some serious thinking on whether tax incentives are the route to success for the campaign or should the emphasis be on an immensely beneficial infrastructure spend.

While a tax holiday for micro, small and medium industrial enterprises has been widely demanded by various ministries, the indirect tax related amendments would go a long way in boosting the Make-in-India initiative for the larger manufacturing community. Going by the steps taken in the previous budget and continuing to walk on the same path, it is being widely expected that the finance minister will continue to rectify the problem of inverted duty structure affecting manufacturers in India by further reducing the basic customs duty on imported raw materials.

It may be recalled that the finance minister had taken various steps to boost domestic production of electronics and reduce dependence on imports. This was done by exempting special additional duty on import of all parts and components for manufacture of personal computers. It is expected that this year, he may extend the benefit of exemption from SAD to manufacturers of other electronic products. An alternative would be to reduce the rate of SAD from 4% to 2%, given that central sales tax has been 2% for a few years now.

Some of the other sectors that are facing a problem of an inverted duty structure are products used in food packaging industry, man-made fibre, synthetic and natural rubber, telecommunication equipment manufacturers, etc.

India has entered into free-trade agreements with South East Asian countries, such as Indonesia, Malaysia, Philippines, Singapore, Thailand, Sri Lanka, Bangladesh, etc. Duty benefits on account of such FTAs create an inverted duty structure, making it cheaper to import finished goods rather than manufacturing or assembling the products in India. Rationalisation of customs duty rates for import of goods from countries with which India has free-trade agreements could be seen.

While enough has been talked about the dire need for introduction of the goods and service tax (GST) in India, at this point, the finance minister would need to ensure that the GST Constitution Amendment Bill receives approval from both Houses of Parliament in the budget session. This will display positive signs of the government’s intention to introduce GST by April 1, 2016.

Having said this, the present design of GST does not favour manufacturing, as it brings trading at par with manufacturing from an indirect tax perspective. This needs immediate attention, as GST being the largest tax reform being taken up by the government, should incentivise manufacturing in India and facilitate ‘ease of doing business’ instead of being a dampener like the FTAs that India signed.

With manufacturing sector contributing only 16% to the GDP, the government has rightly set its eyes on giving a fillip to this sector. Budget FY16 should act as a catalyst to this objective and provide sufficient measures to ensure ease of doing business in India, which would thereby boost manufacturing in India.

By Pramod Banthia

With inputs from Kunal Wadhwa, Associate Director, and Siddharth Garg, Senior Manager (indirect tax), PwC India

The author is Partner (indirect tax), PwC India. Views are personal