The Council of EU Chambers of Commerce in India has organized a webinar on “Production Linked Incentives-Framework & Developments” on June 25 2021. Deloitte was the Knowledge Partner.
The speakers were Saurabh Arora, APAC Tax Head, Siemens Healthineers, Bela Sheth Mao, Partner, Deloitte Touche Tohmatsu India LLP, Anoop Kalavath, Subject matter expert, Rajiv Bajoria, Subject matter expert and Saurabh Kanchan, Subject matter expert.
Dr Renu Shome, Director, EU Chambers welcomed the attendees, speakers and initiated the subject by stating that within a span of a month of PLI scheme announcement, the overwhelming response from global as well as local investors quite emphatically suggests upon the strength and likely success of the scheme.
According to the Economic Survey, PLI scheme aims to play an important role in ensuring efficiencies, creating economies of scale, enhancing exports, providing a conducive manufacturing ecosystem and making India an integral part of the global supply chain.
Several of our policy experts in their articles in financial dailies have echoed the likely effectiveness of PLI. The scheme could be the right step forward to elevate the much needed core competence of sectors specified in it before it is extended to other sectors.
Such production-linked incentive could not only be an effective tool to a cost effectiveness. But more importantly, it could be to bring in cutting-edge technology, which invariably requires significant investment.
However, success of most of the schemes and policies is largely dependent on the adaptive strength with respect to moving contours at various phase of its life cycle in the global eco- system.
Ms. Bela Sheth Mao, briefly introduced the topic and said that incentives worth USD 27 billion for 13 manufacturing sectors have been announced by the government which will paid out over the next 5-6 years and the key purpose of the scheme is to make India an integral part of the global supply chains and therefore this scheme is expected to attract global investments, employment opportunities and enhance exports in India.
Mr. Saurabh Kanchan made a detailed presentation of the entire scheme. He said over the years the States have been active in providing incentives in terms of VAT and GST. The central government is involved in incentives to the manufacturing sectors through tax laws or tax concessions to the northeast and J&K or less industrialized regions. Some incentives are given through excise laws etc, but since April 2020 there are large amounts that have been put across through budgetary allocations to support manufacturing sector in the country and therefore these together State incentives and other aspects will make India a very interesting place to manufacture.
He further added that the objective of the scheme was to improve domestic manufacturing footprint for Manufacturing – domestic and exports the scheme does not cover services. The scheme is compatible with the WTO as the quantum of support is not linked to the export. The scheme is flexible as it combines several project sites, the state incentives are also available.
The parameters of this scheme are that base year is the referral point from which the incremental economic activity is calculated. There are certain qualifications thresholds to be eligible to apply and depending upon which sectors to apply it depends on the revenues that an applicant has (local or global), existing or past and other criteria like net worth criteria etc.
The next parameter is cumulative investments, the cumulative investments should be seen from the lens of what are in inclusions and exclusions, generally land is always excluded from the PLI Scheme. Green-fields are covered under the schemes where a new facility is put up at a new land site; if there is an existing land site and there is a new manufacturing facility that is qualified as a brown field and that is generally covered in most of these schemes. The incentive calculation is based on incremental sales and it goes back to the base year, there is also a requirement to maintain or achieve growth for each year to be eligible for the incentive calculation. There is a mechanism specified for domestic value addition as well.
The last parameter is ranking of projects, this is generally triggered when the applications are more than what the government was envisaging and it also depends on committed investment, exports, total sales, technology transfers, R&D expenses; other sector appropriate criteria.
The Approval process includes filing initial application; Collation, review of documents and filing of application with PMA, the application is then represented before authorities for clarifications and responses to deficiencies for processing. Post approval all the required documents are to be submitted by short-listed applicants. The Disbursement process includes computation of eligible incentives amount in view of eligibility criteria, prescribed threshold and incremental sales. Preparation and filing of disbursement application in prescribed format; audit and review of investments and sales; physical verification likely; detailed reconciliations and data requirements; backup documents support. After everything one needs to do an administrative follow-up with authorities to ascertain status of claims.
Parameters to consider for applying for State incentives are upfront agreement on exclusions and inclusions for eligible fixed assets depending on the items of investment; ability to leverage new investments to amend or review the existing MoU, incentive period, investment period etc.
Consider alternative States offering better incentives; Treatment of intangible assets such as royalty, technical know-how, preoperative expenses etc; domestic or imported used assets; GST linked subsidy or fixed capital subsidy. In case of GST linked incentives, ability to obtain Gross GST vis-à-vis Net GST, based on expected consumption in the State; Investment, production and employment commitments provided by the company and consequences of not meeting those commitments – recovery of past incentives by the Government and Implementation process – documentation, certification, separate GST registration for covered investments etc.
The Corporate Tax benefits is a tax regime for new manufacturing companies. It was incorporated on or after 1 October 2019. Company engaged only in manufacture of any article or thing and research in relation to, or distribution of, such article or thing manufactured by it are eligible and should commence manufacturing on or before 31 March 2023.
The companies should not be formed by splitting up or reconstruction of an existing business; and company does not use any machinery or plant previously used for any purpose. The scheme abolishes dividend distribution tax, Dividends received not taxable for an Indian company, if it onward pays dividend in prescribed time. Access to lower dividend tax rates under the treaty (as low as 5% / 10%), Ease of tax credit in parent company jurisdiction and reduction of group tax cost. Dividend received from foreign subsidiaries is taxable at a concessional rate of 15%*.
Special tax rate of 5%* in case of foreign lenders, for interest on monies borrowed before 1 July 2023 (subject to conditions). There is a strong treaty network with approx. 94 nations. Long term capital gains taxable at a reduced rate of 10%*, in case of nonresident shareholders (subject conditions and treaty benefit, if any). No obligation to file an income tax return by non-resident companies in case of royalty, technical service fee, dividend or interest income, if it has been subjected to WHT as per domestic tax law.
The second half of the webinar was a panel discussion moderated by Mr. Rajiv Bajoria and Panelists were Mr Saurabh Arora, Anoop Kalavath and Mr Saurabh Kanchan.
The panel discussion began with Mr. Bajoria, asking Mr. Arora his experience between the basic state specified subsidiaries and a central scheme for manufacturers and does he think invest India mission will be attractive given the PLI announcements or state needs to come out with a scheme to support the manufacturers separately. To which, Mr. Arora replied that the central and state both must play their part to the economic development. The centre scheme is more focused on the economic developments and the incentives are more targeted towards compensating the competitive disadvantages that the Indian manufacturers grabble with. The state incentives are more targeted to attract investments to their state. The state policies are more into showcasing what these states can offer and how they are more active in promoting developments. Moreover, the states spell out incentives, which they are willing to offer to interested investors, it is kept to the overall investments.
Today PLI’s are for 13-15 sectors and the need to have this sector specific view emanated from the fact that each sector has its own peculiarities and issues, which are sort to be addressed through these schemes. But the state policies largely revolve around just attracting investment although there are states that have sector specific schemes but he feels that more states should come ahead and contribute their bit with this the state and central will complement each other well. He also highlighted that post GST there has been a shift in the manner in which the revenues are distributed, earlier it was an origin-based concept where the producing state gets the tax benefits but post GST it has moved to the consuming states so that has changed the way the states have developed the incentives schemes. According to him the states needs to get more innovative now.
Mr. Bajoria asked Mr. Anoop as he has experience in supporting clients to file PLI applications, what are the top three areas that require attention from the top management to ensure a strong base is being made. And in case is anyone fails to achieve the PLI criteria what are the repercussions, to which Mr. Anoop said that there are typically more number of applications than the government wants to select so the government is very choosy on whom to give the incentives. So, from that point of view, one should have a clear business plans as in what is the investment amount and its bifurcations as the government will verify it as well as ask various questions around it.
The second aspect would be keeping the documents in place and then apply and clarify the doubts and answer certain questions and have various discussions with the authorities. He suggested business to put around team of seniors who are from various facets of management as it becomes easier to response to the authorities.
The third aspects is to try and make the application on time. Answering the second part of the question he mentioned that once you are selected for a particular scheme, then you are awarded for that particular mandate and there will be monitoring of your investments so the eligibility to get the incentives depends on two criteria first is whether you have invested the mandated amount and whether you have made the required investments, in case you fail in any of this criteria then for that particular year you do not get the incentives. There is no other repercussions apart from this.
Mr. Bajoria’s next question was to Mr. Saurabh on what is the criteria meant for grant of PLI benefits is it limited to investments or incremental sales, further what all components does investment envisage. Mr. Saurabh replied that the largest criteria is what the overall sales and investments in the past by the company and then to be able to apply for a particular PLI. One has to commit certain investments and then there is also requirements to achieve sales. Overall the company cannot fall short of one years investment criteria but of it is eventually able to catch up then its fine. Sales on the other hand is a yearly criteria and it is not cumulative and failing in sales criteria means no incentives for that particular year. In case the cumulative incentives criteria’s are not meet then one can even loose incentives that were granted in the previous years as well.
Mr. Bajoria asked Mr. Arora, Pharmaceuticals related PLI’s are fragmented into two parts i.e. medical devises and bulk drug and IVDs. What is your take on the same. Mr. Arora appreciated the efforts put by the department of pharmaceuticals in developing the scheme. The PLI in pharmaceuticals had some far-reaching changes which were represented and which were considered to be one of the biggest bottlenecks in the overall success of the scheme.
The second big thing that is changed now is to categories the investors into groups. DOP was very clearly differentiate MSME with a MNC, so what they have done is depending on the global manufacturing turnover they have characterized the investors into various groups. According to him the government has made a very honest attempt in framing this scheme, they work professionally, they have even constituted a technically team for guidance. Incremental sale revenues are also reasonable to around 7%. Genuine investor would definitely benefit from these schemes.
Mr. Bajoria asked Mr. Saurabh Kanchan that in case of aa newly set-up company what will be the base year and how to access the incremental sales. And if the project is already announced or under implementation at the time of announcement of PLI then will that be eligible under the PLI benefit. Mr. Kanchan replied that for a new entity the comparison is zero economic activity in the base year and therefore everything gets entitled. But there is certain threshold for investment in the past and hence for a new entity the investments are comparatively larger. In case is announced or under implementation it will be considered for PLI provided it has not been commissioned and therefore it should still be in the phase of investment.
Mr. Bajoria talked about the current tax regime that has been framed for the last couple of years. India has become an attractive destination for investments especially for new manufacturing companies with almost 17% and MAT not being applicable. Low ETR would mean saving tax and cash outflow. The base rate of 15% and effective rate of 17% is in line with the new OECD initiative.
The webinar ended with very interactive Q&A session.