FEBRUARY 27, 2016

By Nilesh Bhagat, Director & Darshana Deshmukh, Deputy Manager, Deloitte Haskins and Sells LLP

THE much talked about "Make in India" programme which has garnered a lot of optimism, was launched by the Government of India in September 2014 with an agenda of transforming India into a global manufacturing hub. The underlying objective of the initiative is to encourage multi-national as well as domestic companies to manufacture their products in India along with attracting technological and capital investment in India. The focus of the initiative is on 25 sectors @ of the economy.

From tax perspective, the make in India initiative envisages to simplify the existing complex tax regime, avoid prolonged litigation and provide directional roadmap to the investors.

In the 2015 Budget, a host of announcements were made from a tax and regulatory perspective. Key highlights of Budget 2015 paving a way for 'Make in India' were:

- Location specific savings to promote setting up of manufacturing hubs in notified areas.

- Conditions for claim of incentives in respect of employing new workmen were relaxed.

- In order to protect and encourage the investment climate in the country, implementation of GAAR was deferred by two years and made effective from 1 April 2017.

- Tax rate on payment of royalty and fees for technical services was reduced from 25 percent to 10 percent, with a view to boost inward flow of technology.

- It was proposed to reduce tax rate for corporates in a phased manner from 30 percent to 25 percent over succeeding four years with effect from 1 April 2016.

- Putting controversies to rest, such as claim of additional depreciation in subsequent year of acquisition of plant and machinery and indirect transfer of assets located India by clarifying the provisions.

In continuation to announcements in Budget 2015 and with respect to the proposal to reduce corporate tax rates from 30 percent to 25 percent, a press release dated 20 November 2015 was issued by the Central Board of Direct Taxes ('CBDT') for inviting comments on draft proposal for phasing out plan of deductions under Income-tax Act, 1961 ('the Act'). Further, the government also, constituted a 10 member committee # broadly with a view to simplify the provisions of the Act.

It would be interesting to see how the Finance Minister will align in Budget 2016 the push to the flagship program i.e. 'Make in India' with the proposal of reducing tax rates and phasing out the deductions in a phased manner. Though the industry will welcome any reduction in tax rates, it will still want the tax deductions to continue for some years because the manufacturing industry of India is still in a growing stage.

We here by touch upon aspects worth looking forward to in Budget 2016, which could provide a directional heads up to the ambitious 'Make in India' initiative:

- The Government has endeavored to invite Multinational companies to manufacture in India. One of the options to give Indian manufacturing a boost is to address the tax issues around Toll manufacturing $ by multinational companies in India. , e.g. providing some sort of relief to multinational companies from creation of Permanent Establishment (PE) in a scenario wherein employees of multinational company are present in India for ensuring the quality of products etc. This may be similar to the benefit extended by Finance Act 2015 to fund managers or investment advisors, by providing that their presence in India in certain scenarios, shall not be viewed as a PE of the offshore fund in India.

- With continuously evolving trends in technology and in order to attain a level playing field with the global giants, one could look forward to steps aimed at encouraging research and development and innovation in manufacturing, thereby increasing the manufacturing activity in India.

- A subset of objectives of 'Make in India' is generating employment. Hence, acknowledging the requirement for skilled labour, the government has started skill training program for rural population. Tax incentives for providing requisite skill / trainings to the labour to enable a highly skilled workforce and reforms in labour law would be a welcome move.

- Levy of Minimum Alternate Tax ('MAT') and Dividend Distribution Tax ('DDT') on units of Special Economic Zone ('SEZ') has dented their investor-friendly image. One may expect some relief to SEZs from these tax levies.

- In furtherance to Budget 2015 announcement in respect of reduction of corporate taxes over four years as well as elimination of exemptions and incentives and with release of the draft proposal in this regards, rolling out a clear and time bound road map for implementation of reduction of tax rates and phasing out tax exemptions would provide certainty to investors enabling them to take decisions.

- One could be hopeful on a clear and time bound plan for implementation of long awaited Goods and Services Tax.

With ambitious campaigns such as make in India, digital India, start up India, smart cities and others, the government is working towards channelizing investments in necessary directions. The investors are looking forward to simpler and friendly tax regime for making India more lucrative from an investor's perspective.

@ - Automobiles, Automobile components, Aviation, Biotechnology, Chemicals, Construction, Defence manufacturing, Electrical Machinery, Electronic systems, Food processing, Information technology and business process management, Leather, Media and entertainment, Mining, Oil and Gas, Pharmaceuticals, Ports and shipping, Railways, Renewable energy, roads and highways, space, textiles and garments, thermal power, Tourism and hospitality and wellness.

# - Notification number A.55050/112/2015-Ad.I dated 27 October 2015.

$ - Toll manufacturing is an arrangement where in, principal manufacturer engages another entity, referred to as 'Toller' to manufacture / process raw materials or semi-finished goods owned by principal manufacturer for a fee or processing charges.