Towards the end of the 1980s the idea of travelling to the United States to study, followed by the prospect of working there, still held some charm. By the early 90s, however, reverse migration had begun. Economic liberalization, Y2k and captive process outsourcing prospects held new promise for companies in India.
Many software development companies in western countries, comprising primarily immigrant Indians, had started considering the idea of at least setting up a captive process unit and project development shops in India, for their parent companies in the west. Some proactive states such as Karnataka, Haryana and Andhra Pradesh actively started providing the required infrastructure.
Consequently, indigenous software product development units also made an entry. Western branded hardware companies started seeing an opportunity to sell at a premium in India. Companies manufacturing networking racks for housing computer networking components and specialising in procuring equipment or providing integrated networking services started up.
By the end of the decade, business process outsourcing had arrived and a few software development companies were doing well. New age telecom operators and manufacturers of office modular furniture were gaining ground. With the primary customers for most of these products and services being from foreign countries, payment receipts were in most such cases, in the form of the American Dollar.
Having been a nation that had been struggling to procure enough foreign exchange to finance imports, primarily consisting of the much-needed crude, the powers-that-be immediately started dishing out all sorts of tax and duty exemptions to the information technology companies who were raking in the mighty dollars.
However, during the same period, many issues cropped up that have left us entangled in our archaic laws and half-understood implications for the makers in India, especially those who provided the infrastructure for the IT/ITES Companies.
Capitalising on the opportunity cost, these information technology companies were already raking in huge profits; but as with all subsidies in our country, once given, they were never withdrawn. Nor has the largesse been reduced.
Reforms in Excise Duty Laws, Service Tax, Sales Tax, Labour Laws, Customs Duty, EOU & CT3 Form sales and sales to SEZs, subsidies to IT/ITES – all this, and a more holistic understanding thereof by the Commerce, Finance, Corporate Affairs and Labour Ministries, are still lacking.
Realising the ‘Make in India’ promise
We are in 2014 and filled with hope that the new Government at the Centre, which is not bogged down by the burden of dealing with coalition partners, will concentrate on specific issues and address them. In general terms, reforms are required in application and implementation of various taxes and duties.
To understand some explicit, critically urgent issues, let us look into a few specific points. It pains to see many announcements of reforms being made, without any display of the slightest understanding of ground realities. These announcements might attract industry to try and make in India. But it is doubtful if they can sustain, given how atrociously some of the laws have been laid down; it is appalling that nobody has brought these things out for decades.
For example,
- Excise Duty (ED) is added as a percentage on the basic selling price of a manufacturer. Value Added Tax is charged on the total of basic + ED. That is compounding of tax, the logic in which is difficult to see. It is the government’s prerogative to decide the amount of tax, but it is insulting that compounding of taxation is being enforced for decades.
- Service Tax on the labour component in Export Oriented Units (EOU) is not revenue for the Government. Yet it has to be collected by the manufacturer and remitted to the Government which will then refund it to the same EOU. When a Commerce Ministry directive says that Service Tax is not chargeable and the Finance Ministry notification says it is chargeable, why would a purchasing EOU want to deal with an Indian manufacturer who insists on Service Tax collection? It is easier for the EOU to simply import the same goods. Importing the same does not attract any duty or VAT and the question of Service Tax simply does not get mentioned, more often than not.
- Why should TDS be deducted on Basic + Service Tax? Should it not be on basic charge only? Such rules only give the concerned departments an opportunity to consume a lot of the manufacturer’s time and sometimes, more than only time.
- Special Additional Tax only ends up putting crores of rupees in useless input credit, since the terms of utilising the same are not realistic. The input credit is useless for the balance sheet and since it can technically be utilised anytime by the importer of raw material who accumulates it, it reflects illogically in revenue collection records by the Central Government.
- Similarly, the excise input credit of a manufacturer predominantly catering to EOUs cannot really be used fully, since the focus of the manufacturer will have to now be divided between manufacturing office modular furniture and products for residential markets, simply to utilise the excise book credit. The huge capital expenditure already incurred to set up the manufacturing facility does not really support this change of focus. The alternative is to have a huge build-up of excise input credit in the books.
- Why should a buyer, who is not able to produce form 37 or form ‘C’, not be mandated to pay the difference of the concessional rate of taxes enjoyed, since the buyer is the real beneficiary? The manufacturer having to pay this with interest and penalty does not make any sense. But that is the rule.
Most government departments can attach bank accounts in the blink of an eyelid. Being in a constant state of fear is the way a manufacturing facility works in India. We learn to live with it. Or we simply stop making in India.
The Ministry for Small and Medium Enterprises is responsible for most of these policies. Unless it addresses specifics such as stated above and tackle them, make in India will be a tough ask.
Even though the examples mentioned above are drawn from specific manufacturing industries, the same is broadly true for all those who are making most things all over India. Also it is important to note that this is only the tip of the iceberg.
One can only hope that the “Thoda adjust kar lena”- mentality will finally go and meaningful reforms will be ushered in. Or else, could we still dare make in India?
