JULY 22, 2014

By Pravin Agrawal & Vipul Sippy, Deloitte Haskins & Sells LLP

A much-needed impetus has been provided by the Finance Minister in his maiden Budget 2014 to the infrastructure sector including country's electronics manufacturing sector.

There is no doubt that India's electronics manufacturing has witnessed an asymmetry, which is evident from the country's image as a global hub for software services sector on one hand and its pressing need to create a mark in the hardware manufacturing arena on the other.

There has been a sustained action on the part of the Government, in the form of series of policy pronouncements and roadmap for implementation of the same, to encourage investment in the electronics sector with an objective of increasing India's share in the global manufacturing. In the recent past, a considerable interest has been shown by multinationals in the electronics sector, with investments worth billions of dollars lined up already. The government has given green signal to the setting up of semiconductor wafer fabrication facilities in India.

Under the existing tax laws, investment-linked tax incentive is available to certain "specified business" during the previous year in which capital expenditure is incurred. In an attempt to stimulate investment in the electronics manufacturing sector, the Union Budget 2014 has proposed to include the electronics manufacturing sector business in the eligible category for the purpose of investment-linked incentive.

The FM, in his budget speech, has also emphasized the importance of the manufacturing sector and extended investment allowance benefit to such sector. To boost capital investment in plant and machinery by the manufacturing sector, the Finance Act 2013 had provided an investment allowance to such sector - a 15% deduction (in addition to the depreciation charge) for combined investment of more than INR 100 crore in plant and machinery during the period from 1 April 2013 to 31 March 2015.

In a welcome move, the FM has proposed to make medium size investments in plant and machinery (more than INR 25 crore) eligible for investment allowance. The new scheme will operate upto 31 March 2017. It is further been proposed that the scheme announced last year will continue to operate in parallel till March 31, 2015.

In an attempt to ensure that the capital assets are used for the specified business where investment-linked incentive deduction is claimed, the Union Budget has proposed to specify a lock-in period of 8 years for such plant and machinery.

The Union Budget also brings some cheer to the power sector companies. The current Indian tax laws provide tax benefits to power sector companies, for any 10 out of the first 15 years of a project's life. The sunset date for commencement of operations to qualify for the said tax benefit was March 31, 2014. The Union Budget 2014 has extended the date for commencement of operations for a further period up to 31st March, 2017. Such extension will ensure a lower tax-cost for power companies, subject to applicability of Minimum Alternate Tax @18.5% (plus applicable surcharge and education cess).

The above measures are likely to provide the required impetus to manufacturing and power sector and ensure revival of growth.