With the announcement of the Union Finance Budget for the fiscal 2020-21 in the Parliament on Saturday, it is seemingly clear that the government is upbeat on consolidating its existing financial measures. While tax structuring gets reshuffled with an intention to increase cash in common people’s hands prima facie, employment generation remains elusive in the Budget. Even though there are certain takeaways for industries in general, Budget 2020 is short of evoking a comprehensive nod by industries. Let us look at what Budget 2020 has in store for the manufacturing sector.
Conducive Corporate Tax Regime
A concessional corporate tax rate of 15 percent to new domestic companies in the manufacturing and power sector is step that will certainly encourage the establishment of new companies in the manufacturing sector and boost the ‘Make in India’ program. The benefit to the power sector is also likely to slash the power rate, indirectly benefitting the manufacturing sector.
Thrust on Mobile and Electronics Manufacturing
Finance Minister Smt. Sitharaman announced that the government will bring a policy to encourage manufacturing of mobile phones, electronic equipment and semiconductor packaging in the country. There is certainly a cost advantage in electronics manufacturing in India other than its immense potential to create huge employment.
An inclusive Modified Special Incentive Package Scheme (MSIPS) may come out to promote a 20-odd component manufacturing ecosystem in the country that will go beyond making mobile phones will play a huge role in setting SEZ for the electronic manufacturing sector and establishing India as electronics hub. Clear indication is also given to promote manufacturing of medical devices in which India is still largely dependent on imports.
‘Assemble in India’ Plan
The Economic Survey on Friday proposed its ‘Assemble in India’ plan. Though ‘Make in India’ program was launched with much expectation to establish India as the manufacturing destination of global manufacturing players across industries, in reality still Indian manufacturers largely import their parts and components from outside.
‘Assemble In India’ is therefore a targeted plan to promote India as a hub for assembling products for global major manufacturers or facilitate India to manufacture networked products to make it part of the global chain.
MSME & Startup Boost
MSME sector forms a sizeable part of the Indian manufacturing sector. Hence, a robust MSME scenario is a driver of growth for the Indian manufacturing sector. The RBI had recently allowed a one-time restructuring of existing debt up to Rs 25 crore for the defaulting companies even as their loans are being classified as standard assets. Now the government has asked for a tax relief with turnover upto 100 available in 3 consecutive years out of the first 10 years. Besides, the turnover threshold for auditing for MSME and startup has been increased from 1 crore to 5 crores.
One of the highlights of the manufacturing sector in recent times has been the proliferation of manufacturing startups. The Budget proposes a slew of measures for startups including a dedicated early-stage fund, relaxation of taxes levied on employee stock ownership plans (ESOPs) and fresh tax rebates on these firms based on their turnover.
To resolve the issue of dual taxation on ESOP shares held by employees, Smt. Sitaraman proposed deferring the tax payment by five years, or until employees leave the company, or when they sell their shares—whichever is earlier. This will help startups reduce attrition rates and retain top talent.
Mixed Bag for Automotive & EV Sector
As Smt. Sitharaman declared her Budget to be devoid of any sector-specific, automotive sector which has been reeling under the low sales realization for few quarters, returns empty-handed as its demands were mostly unmet. The automotive industry has been demanding a slash in GST rate and waving of customs duty on lithium batteries for EVs to promote EV manufacturing in the country. Currently, battery costs almost 40-45% of the cost of EVs due to increased imports duty.
The government, however, has other plans regarding EVs. While it has budged from slashing imports on batteries, it has increased import duty on Completely Built Units (CBUs) in both EV and conventional vehicle categories to promote manufacturing in the country. While increased import duty on CBUs will curb imports, retention of exiting duty on EV batteries will continue to keep EV prices higher at a time government is planning to make mass adoption of EVs.
To realize the effect of promoting domestic automotive manufacturing there is a need to boost automotive demand across both categories to make the automotive sector robust.
The is even inevitable when the government has announced an outlay ₹1.7 lakh crore for transport infrastructure to construct 2500 access control highways, 9000 km eco-development corridors, 200 coastal and port roads, 2000 km strategic highways, Delhi-Mumbai expressway and 2 other corridors will be completed by 2023.
Increased Consumption with Better Purchasing Power
As announced in the new tax regime, 70 tax exemptions will be removed but the income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10% down from current 20%, income between Rs 7.5 lakh and Rs 10 lakh will be taxed at 15% down from current 20%, and income between Rs 10 lakh and Rs 12.5 lakh will be taxed at 20% down from current 30%. Income between Rs 12.5 lakh and Rs 15 lakh will be taxed at 25% down from the current 30%. Incomes above Rs 15 lakh in a financial year will continue to be taxed at 30%.
The finance minister has mentioned that the Budget 2020 is actually targeted at boosting incomes and enhancing purchasing power with the reduced tax burden. Besides, the dividend distribution tax has been removed in the new tax regime which would encourage small investors. With the better cash flow and improved purchasing power of the common people, manufacturing including the automotive segment may witness better sales realization.