The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm

CNBC TV18
Network18

Budget 2015: Tax Policy Support For 'Make In India'?

Published on Mon, Feb 23,2015 | 14:16, Updated at Thu, Feb 26 at 22:40Source : CNBC-TV18 |   Watch Video :

Menaka Doshi: It is Prime Minister Narendra Modi's most ambitious programme 'Make in India' and so expectations are that Budget 2015 will make tax policy changes to help Make in India get off to a shining start. But before we get to tax incentives, I asked my panelists what 'Make in India' means to Make in India.
 
VS Parthasarathy, CFO & Group CIO, M&M: I kind of keep joking with my wife that it is not an instant noodle or an instant dosa but it has to be fermented and then only the next day you can have this. So there is no magic, which is going to happen straightaway saying this is going to happen. So, whatever we are going to do is going to lay the steps for things to happen. For example, in the defence if you say I want to do something to make a given request for proposal (RFP) today, it will take three years for the programme to come through. So first and foremost if you are thinking about 'Make in India', think long-term, don't think today.
 
Second, we cannot be good at everything. So, 'Make in India' is not about make everything in India. We must find what we are good at and then try to do that. For example, China is good at making long runs and big even if it is million parts scale then that is what they would like to do. What is India good at? That is an important aspect.
 
Menaka: What is India good at? What is Make in India according to you?
 
Parthasarathy: I will tell you what I think India is good at. One, it is short runs, skill, innovation and engineering. If you combine these four, this is one recipe that is good for India.
 
Can India be the tractor capital manufacturing capital of the world, surely it can be because these are short runs where skills are required etc. That is one in the spectrum they should look at.
 
They should also look at something which gets cost arbitrage into play at the beginning but it doesn't end with cast arbitrage. It ends with innovation arbitrage and that is where the skill again comes into play. So, I would say these are two aspects and then the third is to see what is strategic to India. I think two areas – things like telecom, infrastructure and defence on one side and things which have very vast internal consumption like TVs, electronics, cell phones – these are mass consumed within India. So for India, can we produce any of these things in India?
 
A Subba Rao, Group CFO, RPG Group: It is a fantastic concept. It is not just game-changing, but it is a multi-orbit shifting concept when it is executed fully. So what does it mean for us? I believe it is manufacturing and manufacturing cannot come without technology, without innovation, without research, so all these would precede or would concurrently happen along with the manufacturing process.
 
I don't think we have any core competences. We don't need to create any core competences. China didn't have any core competences when they started.
 
Menaka: In specific areas as Mr Parthasarathy pointed out, saying we are good at some things, we should try and focus on that as opposed to spreading ourselves.
 
Rao: That is history. The future can be different.
 
Menaka: What is needed today – just give me a laundry list of things that are needed to enable this 'Make in India' policy?
 
Parthasarathy: State and central government has to act in ‘jugalbandi’. If they are going to act separately, it is not going to work. Second is they have got to get 'Make in India' also, make it easy to be in India not just for the people who come from outside but for people here as well. Third is, how do you welcome them in the initial part of the year for their investment that they are doing, how you are going to enable that. Some of these, like megaprojects etc, now need to have a broader base for it to be understood.
 
Menaka: Are you talking about incentives?
 
Parthasarathy: Yes. Megaproject incentives, whatever name you call it, How do you ease them in and then the laundry list is – get minimum alternate tax (MAT) to zero, reduce MAT or get it closer to zero for these kind of projects, because they will need to be given some leeway in the initial year.
 
Menaka: What role does tax policy play?
 
Parthasarathy: It is necessary but not the only factor in 'Make in India'.
 
 
 
Menaka: 10 percent, 20 percent, 30 percent of the success of Make in India will lie in tax policy?
 
Rao: Tax, I think it comes later. For Make in India, a reality of the life we have to create large lakhs of acres of land available for the system. If you want to acquit the land from the farmer, from other owners it is not going to happen. It will take a century.
 
So, if you want to create that land available for this, one easy fix solution and you can go through the satellite images of our forests, there is no forest in so called forest. De-reserve 10 percent of the total forest land in the country where there is no forest and make it available for the manufacturing activity and create all attendant facilities there whether it is water, railways, airports and captive power plants just adjacent to these zones. Create 1000 zones of 10,000 acres of each in the country with single window clearance system. There you go to the gate of each zones and get all the clearances and setup. No word labour would be used for those who are employed in those zones. Those are all employees.
 
The first thing in the labour reforms you have to do is remove the word labour and create that kind of pride for the people who are going to work on the shop floor so that they are on par with employees and create that kind of skill set for them that they can get jobs anywhere. Why you and me would not get into unionism because we can get the jobs anywhere, because the skill set is available. The same kind of skill set has to be made available for all the people who are going to work on the shop floor and there won’t be any union.
 
Menaka: What do you believe needs to be done on the tax front at least that gives industry and business the confidence that this is not just an ambition and big talk, but a reality that is going to come very soon?
 
Vanvari: In this Budget MAT on SEZ – highly contentious. What is the point of saying I am giving 200 percent of R&D benefit and then say you have to pay MAT on it? Let us have cohesive policies. If you want to encourage innovation, if you want to encourage R&D, if you want to encourage development there is no point in putting MAT through the backdoor.
 
Menaka: That links into what Pranab has also been saying that we need to desperately streamline how MAT is applied especially for instance if you are giving an investment allowance benefit as you were telling me and then imposing MAT. You are taking away that entire investment allowance benefit, right?
 
Sayta: Absolutely, one hand is handing over and the other is taking it back; it doesn’t make sense at all. So, if you really want to incentivize manufacturing, if you want to bring back industrial growth, you need to give incentives and remove impediments. Those impediments can be legislative driven, rule driven, like for example the inverted duty structure where I have unutilized credits for years on end. The other is on the administrative side. Remove impediments, make things easy, and make a stable certainty led tax environment which is tax payer friendly. On the other hand, apart from removing these impediments both on the legislation and administrative fronts, also give incentives and drive behaviour in a certain manner and that could be by way of investment allowance.
 
Menaka: ..which is the most commonly discussed expectation right now?
 
Sayta: Absolutely and I think that will be a big thing if you streamline it in a right way. If today, I am going to get investment allowance without any restrictions of MAT that really means I have an investment allowance that incentivizes manufacturing. If we are talking of SEZs and if you want to drive it, the way SEZs have suffered over the last couple of years is real big.
They went back on a promise, SEZ has originally introduced said MAT which will not be levied on developers; MAT will not be levied on SEZ units. The promise also was no DDT on SEZ developers. All these promises were really withdrawn in somewhere around 2012.
 
In 2012-2013, the growth in exports from SEZs was 30-31 percent plus. In 2013-2014, the growth in exports from SEZ is less than 4-5 percent. So, this is the kind of impact it creates and the impact on the confidence, the trust loss or deficit that gets generated because of such policies is immense which cannot even be quantified in monetary terms because it has a very long-term impact if not even a medium-term.
 
Menaka:  Are you saying we need to relook and revive the SEZ program because at one time there was a lot of criticism that the SEZ policy of the government of India faced saying this is more a real estate play than an effort to build the zones of the scale that China built in its free economic zones. So, did we get it right at the first place, should we go back to that or should we just rethink this because after that we have the national industrial manufacturing zones policy that came about which was Anand Sharma’s baby; that is still somewhere floating around, nobody knows what is going to come off that.
 
Sayta: My point in all of this is I think the policy was good; it always will have space for improvement. However, stability is what is required. I can’t bring in something and three years later completely relook at it.
 
Parthasarathy: I would like to second what has been said that the SEZ policy of 2012 was there, let us start with that and there is always room for improvement.
 
Rao, I have a slight disagreement here. There could be issues and those issues would derail the entire program. There were kind of issues of in the past SEZ initiative also.
 
Menaka: So, more of a real estate play than anything else?
 
Rao: I wouldn’t say more of but partially it was real estate play and it was hyped up and the entire program was derailed. Rather than this if the entire manufacturing zones, whatever you call it, are owned by the government, then this would not come into this situation.
 
Menaka: As a country, we have been dancing around this in the last decade and I do not think there is a clear political consensus on whether we should create zones, should those be export oriented zones or domestic manufacturing oriented zones and therefore then what kind of incentives can you make available. What do you think will enable Make in India?
 
Vanvari: I think a combination of both. We are saying we want to make smart cities happen, we want to make corridors happen, we want to make sure India is inclusively growing which is backward area happening, for that it is important that even domestic consumed manufacturing is encouraged. This SEZ holiday was more for these tax concessions when we were forex fragile and today if you see the oil prices, we look forex okay. I do not know how long it will last but today it looks okay. So, concessions have to be a combination of both.
 
Menaka: Tax policy - what should the support tax policy be?
 
Vanvari: Tax holiday is no dividend distribution tax, you can have innovation, there is no MAT on the research and development (R&D) stuff which is happening and you can do so many different things with it.
 
Rao: On exports, do not levy any income tax, zero income tax and on exports, no excise duty.
 
Menaka: This is equal to what the SEZ policy was..
 
Rao: Yes - because if you are doing something for the service for the country..
 
Menaka: For how many years though because the SEZ policy incentives are coming to an end now. Are you saying for a ten year holiday, five year holiday, 20 year holiday?
 
Rao: For exports perpetually because you are earning foreign exchange for the country.
 
Sayta: Why should an exporter get a privilege over a domestic manufacturer, who is going to substitute imports which otherwise happens. After gold probably the biggest import item is electronics. If I am going to manufacture in-house money saved, foreign exchange saved is money earned, foreign exchange earned. So why should it be different. I am quite with you on that. All that I say is when we talk of business and what it is that is required to review manufacturing, to revive business to generate employment - (a) we need significant infrastructure because that is an impediment today. Why are we not globally competitive in India? I think we have the best of minds; we have the best of entrepreneurial skills. Why are we not competitive - (1) we lack infrastructure whether it is ports, power, transportation, logistics (2) we are mostly - when it comes to our businesses, capital starved. So, one other incentive - because a lot has been spoken about other things, I think apart from infrastructure and the incentivisation of infrastructure, what we need is we must ensure that savings, we have significant savings in India but they ought to be channelised in the right manner to financial instruments, we need to deepen our debt markets, we need to ensure that even capital is available to these businesses in a manner that is efficient otherwise we are not globally competitive because the Indian businessman has to pay a much bigger cost of capital and how can tax policy drive that probably we had 10(23G) at one time, a section in Income Tax Act, where an investor into infrastructure also is incentivised. I am now trying to channelise my savings into financial instruments, into specific sectors where there is a crying need to ensure are reenergised or revitalised.
 
Menaka: What more can this Budget do since certain incentives already exist for us?
 
Sayta: This Budget can help in deepening debt market which is big.
 
Menaka: Specific steps?
 
Sayta: Specific steps could be, for example giving concessional tax treatment to interest for investments into specific sectors, corporate bonds of companies engaged in specific sectors. There could be minimal withholding taxes on those, there could be significant amount of capital gains benefit in case those bonds are sold at capital gain later on, exemptions available like we have for shares. Why should there be a difference? If the richer class, which can afford to take risks, can invest in equity and get exemption, then why should maybe a smaller person or a poorer person who has savings of a small amount not invest in safe and secure bonds and not get the same exemption.
 
Menaka: So, those are benefits to channel investments into infrastructure, benefits of infrastructure projects as well for instance as power generation enjoys right now?
 
Sayta: Absolutely and there should not be a MAT on that for the simple reason that otherwise we are coming back - there should not be MAT on that and I do not want to raise that point again but I am just clarifying that we said that but I think that's what we need to do. If we ensure that we give enough incentives for these sectors and leverage on our strength which is our domestic market, we will have a globally competitive infrastructure, we will then have a globally competitive manufacturing base which will help generate employment and growth.
 
 
Menaka: We have consensus on stream line minimum alternate tax (MAT). Take away MAT where other incentives are being utilised because otherwise MAT kills the benefit of that incentive. Definitely do not make MAT so onerous that the incentive is pointless that is one. Pranav has suggested a bunch of incentives to direct money towards infrastructure and for infrastructure projects as well. We already have a bunch of incentives available for research and development (R&D) and technology in the country. What more do you want to add to this list that you expect from the government in this Budget?
 
Vanvari: From this Budget perspective/fiscal policy perspective, nothing much more. GST is clear – everybody is waiting for an integrated market and that is a common topic wherever you discuss this. As you started with, we are just looking at the tax portion of it. Tax policies will not make ‘Make in India’ happen.
 
Menaka: In tax what do you expect in the Budget besides what we have already discussed so far?
 
Vanvari: You can look at smaller things like, if you are taking technology, borrowing collaborative technology from somebody withholding tax rates should be dropped may be 5 percent, 10 percent. International borrowings in particular sector should be reduced. You should encourage foreign money by having clarity of tax laws, giving certainty and so on and so forth because which company has set up a manufacturing plant in India from overseas also? It has been a while since that has happened.  
 
Parthasarathy: To add to it one is stability of tax. Whatever they are doing can we say that we have stability? Let us say, a person from outside is coming to India and if I do today and I take over the next Budget, that is one. Second is, can we make it administration proof that what is being giving by the Budget is taken away in all the administrative calculations that are done like R&D then this is not counted and that is not counted. Who does this, people who did not intend to but they are the consequences. These were two important aspects of that point which you made.
 
Menaka: Anything else you want to add to the list?
 
Rao: Remove all the surcharges that is education cess, over Rs 1 crore of income if you are earning something so there is additional tax. Remove at least, to make a beginning to remove all these taxes.
 
Second is, you have to phase the program of the tax reduction. So, the next five years these are going to be the tax rates the government has to give a commitment every year – I am going reduce the corporate tax rate by one percent and so on. So you reduce, like Singapore has an attractive tax policy. The tax rates are low – both personal as well as corporate. You bring domestic tax rates on power with best destinations like Singapore in a phase manner.
 
How does the government compensate these? One way is through incremental GDP, second this country has a spending power. This country does not have a tax paying ability. This is a basic dichotomy. I know many people, friends and families who have the purchasing ability to buy large homes, BMW and Mercedes cars and all those things, but they do not have tax paying ability.
 
Menaka: That is called criminal?
 
Rao: Because, the system is allowing it, so who is criminal then right from politicians to bureaucrats to business people everyone is criminal.  
 
Menaka: So reduce rates and stream line policies for better compliance?
 
Rao: How do you stream line is in a quick manner, bringing income tax on spending, not on excise. Not indirect tax, it is a direct tax. Say, for example – if I am buying a BMW levy 20 percent tax on this and go and claim in your return by way of tax deducted at source (TDS). So, the entire spending which is not getting accounted for today, it will come under the tax net.
 
Menaka: What would you add to the list of what you expect from the Budget?
 
Parthasarathy: Add GST certainly and second is takeaway the early investment disadvantage, disincentive. Just to give a perspective that anybody who goes to a particular place to invest first, he kind of starts at a very low scale because it is still not taken out. Once couple of years later when things become alright, everybody else flocks to that place.
 
Menaka: How do you take away that disadvantage?
 
Parthasarathy: For that guy, who comes in early makes the end date common to everybody but the start date of the first guy who comes in is a little longer than the guy who comes later. For example, if you give 10 years after two years it should start the first guy who comes in gets 14 years instead of 12 so that is what I mean. That is a real early disadvantage so nobody wants to go first but with this more people will want to start faster because they will have a bigger advantage.
 
Menaka: What are your realistic expectations?
 
Sayta: I feel very focused incentives rather than across the board incentives are what is required. When I say incentives, complete not taken back through the MAT. Second, a big shift in mindset is needed. In the way this law is administered, we need a stable and definite trust and confidence building tax administration. These two things from a tax policy and administration stand point should be enough.

 
Twitter


 
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.