Union Budget 2021: PLI scheme needed on continuous basis to maintain investment momentum, employment generation

Representational image. Reuters

Union Budget 2021 is being touted as a game-changer for the Indian economy after the COVID-19 driven washout of the ongoing financial year. In the past 10 months, India Inc has seen unprecedented lows on both demand and supplies. However, recent revenue collection details seem to suggest some level of movement on the upward trajectory in this regard.

The government has been trying to incentivise setting up of production facilities to emerge as an attractive alternative for shifting of existing supply chains in Asia. For this purpose, the production linked incentive (PLI) scheme was launched for different sectors which have drawn the attention of some major international and domestic players. This scheme has also been recently extended to several other sectors including auto components, telecom and networking products, advanced chemistry cell batteries, textile, food products, solar modules, white goods, and speciality steel. Details of the scheme including investment and production thresholds for the extended sectors are awaited.

Since the current framework of PLI schemes gives a limited time window to apply, it is primarily a one-time investment boosting initiative. Such schemes are indeed required on a continuous basis for maintaining the momentum of investments and employment generation. The industry is also keen to see the rollout of the policy for phased manufacturing programme (PMP) which is being worked out for products such as furniture, plastics, surgical instruments, toys and consumer durables.

While there have been efforts to simplify the tax structure and offer incentives for new investments, the effectiveness of these measures is yet to be felt in their entirety. Tax certainty is also a key aspect which companies consider while making investment decisions. For example, clarity on the scope of ‘intermediary’ is something which eludes the taxpayer till date. An increasing number of instances of blockage of credits by tax officers are also coming to light on account of mismatch of credits in periodic GST reports. Any immediate action by authorities without appreciating the underlying reasons adversely affects the working capital of companies.

While the officers have been granted powers to prevent misuse of credits, lack of guidelines often creates unintended impediments for businesses. Similarly, multiple audit proceedings initiated by tax officers across jurisdictions end in duplication of efforts and strains the resources of companies. These factors lead to apprehensions by investors on the interpretation of provisions by Indian tax authorities and complexities in compliances.

The in-bond manufacturing framework which is designed to help better the cash flow and working capital management for manufacturing units, has received an unenthusiastic response so far. This is primarily because of the lack of clarity on several operational aspects. While some FAQs have been released, there are areas which still need to be clarified for boosting investor confidence.

The recently released RoDTEP scheme for incentivising exports also has several aspects which need clarity, especially on restrictions around schemes which cannot be used in conjunction with RoDTEP. The future of schemes such as SEIS and other schemes under the Foreign Trade Policy (FTP) is also not clear at this stage.

For several industries, raw materials for manufacturing are not domestically available triggering the need to import certain key raw materials. Given that India has a high number of disputes on Customs classification of products and applicable rates of duties, and effective advance rulings mechanism can bring in certainty for importers. While the mechanism was notified in 2018, it is yet to yield desired results. Dedicated judicial and technical members should be appointed for the same and jurisdictions should be distributed at port level. This would help in establishing advance rulings for Customs as an efficacious mechanism.

At this juncture, India Inc expects significant steps by the government for bringing in certainty on tax law and policy framework. It should also be ensured that the tax officers appreciate these clarifications in the true spirit. While PLI, PMP and FTP are not directly linked to the Union Budget, the government should expedite work on the same to bring more clarity. The industry needs efficient and sustained incentive policies to create a viable investment environment. These aspects together could help India Inc bounce back and make the country amongst the top investment destinations.

The writer is Partner with Deloitte Haskins and Sells LLP. With inputs from Siddharth Tandon, Director.