AUGUST 29, 2016

By Vimal Pruthi, ACA, LLM

THE National Democratic Alliance (NDA) Government while campaigning for Central elections in 2014,had made billions of people of India, to dream of an India which is free of poverty, unemployment, sluggish growth and much more. With all this to achieve, NDA Government led by Prime Minister Modi has introduced an army of schemes including:

•  Make in India

•  Stand-Up India

•  Digital India

•  Skill India

One of the key initiatives of the Government of India is "Make in India" drive for which the Prime Minister has travelled across the globe to allure foreign manufacturing giants to come and start manufacturing in India.

Further, the NDA Government has made enormous efforts to bring all political parties to agree for the introduction of the much awaited Goods & Service Tax (GST) Law. This is certainly is a big achievement for ease of doing business and consequently a major attraction for foreign manufacturers to setup business in India. Prime Minister Modi has termed the passage of GST Constitutional Amendment Bill in Parliament on 08th August, 2016, "a step towards ending tax terrorism in India". The implementation of proposed GST will make India a "One Tax Nation".

"Make in India" and introduction of GST,both independently have been appreciated by all sections of society. However, the introduction of GST can adversely impact the "Make in India" scheme in few sectors, if the Government does not take remedial measures for this.

Differential Tax Cost under Current Tax Regime:

Under the existing Indirect Tax Laws, the Law makers have time and again resorted to levy of higher countervailing duty in lieu of Excise duty on the import of goods in India as compared to Excise duty levied on similar goods domestically manufactured in India. The differentiation was made to promote manufacturing in India. Few products, on which there is a differential tax regime on import and manufacture in India is depicted below:

There are many other products covered under Notification No. 1/2011-CE dated 01/03/2011 on which there is differential duty which lures foreign manufacturers to establish plants for manufacture of such products in India.

Tax Cost under proposed GST Regime:

However, under the draft Model GST Law, Government does not propose any such differential tax structure for import and domestic manufacturing of similar goods (as per current understanding of GST provisions) in India. Thus, at present under the proposed Model GST Law both importer and domestic manufacturer may be subjected to equal rate of GST i.e. 18% (assumed to be Revenue Neutral Rate). Further, the set off of GST payable on supply of goods manufactured in India (i.e. Central and State GST) and GST payable on import (i.e. Integrated GST) will be available without any differentiation. This will de-incentivize the domestic manufacture of specified goods in India under GST regime.

Many foreign companies are making plans to start manufacturing in India, considering the benefit of reduced rate of duty on domestic manufacturing on specified goods under the current tax regime. Incase the benefit of lower duty to domestic manufacturer is not continued under the proposed GST regime, then such tax policy will certainly have a negative impact on the "Make in India" drive of the Government of India and will also demoralize foreign investors those have already made huge investments in India to avail benefit of this differential taxation regime.

In the present situation, there is no legal obligation of the Government to continue with such differential taxation regime. However, it remains the moral obligation of the Government, to continue this benefit of differential taxation even under the proposed GST regime. Further, this differential taxation will keep attracting new investors to "Make in India".

With many representations from various associations being made to Government to protect the interest of domestic manufacturers under GST regime, one can only hope that the Government will consider the same and ensure that the proposed GST and "Make in India" run on the same track.

(The author is Associate Director, PwC Private Ltd. and the views expressed are strictly personal. The author was assisted by Rahul Agarwal (ACA).)