While the budget matched what the industry was expecting, there needs to be an alignment of incentives and production subsidy to create the necessary ecosystem to promote manufacturing.
Finance Minister Nirmala Sitharaman’s second budget carried with it a number of expectations and the central one from an indirect tax perspective was that she will promote Make in India. The theme of Budget 2020 centrally revolves around three aspects: Aspiration, economic development and compassion. The FM has emphasised in her speech that GST reforms continue to be a priority and has reinforced the government’s intention of implementing simplified returns from April 1, 2020. Also, the e-invoicing mechanism proposed by the GST Council will be implemented in a phased manner from this month (on optional basis) with the aim of facilitating compliance.
This year’s Union budget, as expected, continues to maintain its focus on the ‘Make in India’ policy. In order to boost India’s domestic labour-intensive sectors, this budget increases the customs duty on articles like furniture and footwear. It has been proposed to levy a nominal health cess on the import of medical equipment. This will give impetus to the domestic industry and also generate resources for health services in the country.
One of the pillars of Digital India initiative has been to build domestic capacity in electronics by bringing net electronic imports in India to zero by FY 2020. In order to synchronise the electronics industry with “Make in India” and “Digital India” a Phased Manufacturing Programme (PMP) was initiated since 2017 with an objective of imposing Basic customs duty on import of parts of mobile phones to create incentives to manufacture/ assemble in India. However, for some parts industry has been representing to defer PMP till the capacity building for that product happens in the country. Also, some components have not fully achieved the manufacturing ecosystem in the country and this budget intends to further increase the customs duty on such items to create the necessary disability for importing those components.
Incentivising mobile phones manufacturing
Accordingly, the basic customs duty on PCBA has been increased from 10 percent to 20 percent and charger/power adaptor of cellular mobile phones has increased to 20 percent. Further, BCD on headphones and earphones will be increased to 15 percent. The withdrawal of exemption from BCD on fingerprint readers/ scanner for use in manufacture of cellular phones will lead to an effective rate of 15 percent. Exemption of social welfare surcharge on specified items as information technology software, microphones, PCBA, loudspeaker and set top boxes have been withdrawn. These measures would lead to incentivising manufacturing of mobile phones in India and promoting exports of the same. Also, the custom duty rate of electric vehicles has been increased with the same objective of reducing the focus on imports and the promotion of local manufacturing of eco-friendly technology. On the other hand, exemptions have been granted to inputs and raw materials used in the manufacture of certain parts of mobile phones which will aid the domestic manufacturers in reducing their cost of manufacturing.
From a common man’s perspective also, there is some relief in this budget such as concessional import duty rates have been prescribed for products such as milk, butter, cheese and ghee. Apart from some concessions, there has been an increase in import duty on household articles such as tableware, kitchenware as well as some domestic appliances, basically to promote domestic manufacturing by the MSME sector.
The budget also tends to strengthen anti-dumping duty measures and countervailing duty measures to avoid circumvention and also lays down stringent guidelines for administration of Rules of Origin to avoid misuse of FTA benefits. A concept of electronic duty credit ledger has been introduced and will be used to regulate the passing on of incentives to genuine taxpayers and avoid the misuse of benefits available in FTP.
From GST perspective, certain amendments have been incorporated in the central Goods and Services Tax, 2017 and the Union Territory Goods and Services Act, 2017 for improving compliance and putting in effect the decisions of GST Council. The government has taken further stringent measures in this budget in order to curb fraudulent practices such as issuance of fake invoices or availment/utilisation of credit on the same. Suitable amendments have been made in the Act to make the offence of fraudulent availment of input tax credit without invoice or bill cognisable and non-bailable.
Overall, the Budget is focussed on boosting the manufacturing sector in India and improve the ease of business as well. While the budget matched what the industry was expecting, there needs to be an alignment of incentives and production subsidy to create the necessary ecosystem to promote manufacturing in India. While the tariff barriers will create sufficient disability to serve the Indian market, the necessary ecosystem needs to be developed for the products manufactured in India to be competitive in global markets to promote export to harness the true potential of the labour-intensive industries. In this regard, acknowledging assemble in India as an end in itself is a step in the right direction at this juncture.
Bipin Sapra is Partner -Indirect Tax at EY India. With inputs from Pratiksha Dhawan, Manager.