how dare you MAKE IN INDIA

Prelude (Late 80’s – 2014):

Towards the end of the 1980s the concept of travelling to the United States to study, followed by the prospect of working there, still held some charm. By early 90s though reverse migration had begun. Economic liberalization, y2k and captive process outsourcing prospects for western companies in India held new promise. Many software development companies, comprising of immigrant Indians, in western countries had started considering the idea of at least setting up of captive process and project development shops in India, for their parent companies in the west. Some proactive states like Karnataka, Haryana and Andhra Pradesh actively started providing the required infrastructure. Indigenous software product development units also made an entry. Western branded hardware companies started seeing an opportunity to sell at a premium in India. Companies manufacturing networking racks for housing computer networking components and specializing in procuring equipment/providing integrated networking services started up.

Towards the end of the 20th Century, business process outsourcing had arrived and a few software development companies were doing well. New age telecom operators and manufacturers of office modular furniture were gaining ground. With the primary customers for most of these products and services being from foreign countries, payment receipts were in most such cases, in the form of the American Dollar. Having been a nation which had been struggling to have enough foreign exchange to meet imports, primarily consisting of the much needed crude in the recent past, the powers that be immediately started dishing out all sorts of tax and duty exemptions to the information technology companies who were raking in the mighty dollars.

However during the same period we have seen many issues which have left us caught up with our archaic laws and their impact on semi-understood implications on the makers in India that provided the infrastructure for the IT/ITES Companies. Capitalizing on the opportunity cost these information technology companies were already raking in huge profits and as with all subsidies in our country, once given, it has never been withdrawn. Nor has the largesse been reduced.

Reforms in Excise Duty Laws, Service Tax, Sales Tax, Labor Laws, Customs Duty, EOU & CT3 Form sales and sales to SEZ, subsidies to IT/ITES in terms of a more holistic understanding by the Commerce, Finance, Corporate Affairs and Labor Ministries were and are still lacking.

Present day:

We are in 2014 and filled with hope that the new Government at the Centre, which is not bogged down by the burden of dealing with coalition partners, will concentrate on specific issues and address them. In general terms, reforms are required in application and implementation of various taxes & duties. But to understand some explicit crucial issues of urgency, let us look into a few specific points. It pains to see many announcements of reforms being made, without any display of the slightest understanding of the ground realities. These announcements might attract industry to try and make in India. But it is atrocious how some of the laws have been laid down and it is appalling that nobody has brought these things out for decades.

For example,

– On the basic selling price of a manufacturer, Excise Duty is added as a percentage. Value Added Tax is charged on the total of basic + ED. That is compounding of tax. Cannot see logic here. It is the Government’s prerogative to decide the amount of tax but it is insulting that compounding of taxation is being enforced for decades.

– Service Tax on labor component to EOU is not revenue for the Government. Yet it has to be collected by the manufacturer and remitted to the Government which will then refund it to the same EOU. When a Commerce Ministry directive says the ST is not chargeable and the Finance Ministry notification says it is chargeable, which purchasing EOU will want to deal with an Indian manufacturer who insists on the ST collection? It is easier for the EOU to simply import the same goods. Importing the same does not attract any duty/VAT and ST matter simply does not get mentioned, more often than not.

– Why is TDS to be deducted on basic + Service Tax? Should it not be on basic service charge only? Such rules only give concerned Departments opportunity to consume a lot of the manufacturer’s time and sometimes more than only time.

– Special Additional Tax is really sad. One only ends up having Crores of Rupees in useless input credit since the terms of utilizing the same are not realistic. The input credit is useless for the balance sheet and since it can technically be utilized anytime by the importer of raw material who accumulates it, reflects illogically in revenue collection records by the Central Government.

– Similarly Excise input credit of a manufacturer predominantly catering to EOUs cannot really be used fully since the focus of the manufacturer will have to now be divided between manufacturing office modular furniture and products for residential markets, simply to utilize the Excise book credit. The huge capital expenditure already incurred to set up the manufacturing facility does not really support this change of focus. The alternative is to have a huge build up of Excise input credit in the books.

– Why should a buyer who is not able to produce form 37 or form ‘C’, not be subjected to pay the difference of the concessional rate of taxes enjoyed, since the buyer is the real beneficiary?  The manufacturer having to pay this with interest and penalty is completely senseless. But that is the rule.

– Most Government Departments can simply attach Bank accounts in the blink of an eyelid. Being in a constant state of fear is the way a manufacturing facility works in India. We learn to live with it. Or simply stop making in India.

– The Ministry for Small and Medium Enterprises is responsible for most of these policies. Unless it addresses specifics such as stated above and tackle them, make in India will be a tough ask.

Even though the examples in this write up are drawn from specific manufacturing industries, the same is true for all those are making most things all over India. Also it is important to note that a very few issues have been brought up here. This is only the tip of the iceberg. Thoda adjust kar lena should go and meaningful reforms should come…

Do we still dare, make in India???

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8 thoughts on “how dare you MAKE IN INDIA

  1. Raj Kapoor says:

    this is hitting the nail right on head …
    compound taxation at time really seems like cheating ,
    we have Road tax chargeable as %age of vehicle cost , funny is they charge that %age on the value added with VAT and Entry-tax , ending up customer paying Tax on Tax ,
    well it may not have an effect directly on manufacturer but it lowers selling and that brings a cascading effect .
    I agree 100% with whats been said in this article .

    Like

  2. INDER BAWA says:

    No doubt Tax regime is not only complicated , But also lac of logic & coordination , In fact we are paying for poor governance without promoting manufacturing activities rather harassing ,

    Like

  3. Top To Dos to “Make In India” a Success

    1) GST @ 16% goes to Escrow A/c and 5% goes to Centre + 5% to State + 5% to Local body + 1% to Tax Payers Association / Welfare Fund supporting them in case of Seminars, Professional Training, Insurance, Social Work, Education, Clean India Movement etc.

    This is I call a hassle free and constructive and something with Carrot Approach. And we can see the development in our local area due to Local Share. No Entry Tax required.

    2) Easy, Fast track Loans to SMEs @ 10% like Home Loan and Auto Loans which revived their industry and markets.

    3) Cheap Land on 25 year Lease with Road + Power + Water. Germany has Global Companies in small villages.

    4) 100 Vocational Training institutes where we train and induct lakhs of unskilled labour to skilled manpower. Trainers and machines from the best in their field and the material made in these colleges can be purchased by Govt Depts at cheapest price as there is no rent, power, machine investment, labour cost but just raw material cost. This will help us to stop poaching labour from other factories at higher cost but giving same input to the industry thus making us expensive than China. Masons, Carpenters, Machine Operators, Service Operators, Electricians, Plumbers, Painters etc and teach them safety, process, finish & optimisation.

    5) Single Window Fast Track, Factory Lic + Tax Registrations.

    6) Rationalised, Simple, Fast Track Counters and Easy DTC, Import Duties. Abolish LBT / Octori / Entry Tax as covered in GST. Time is essence of any business.

    7) More FTWZs for EOUs.

    8) Learn and Do what ever it takes to kill competition from China. Cheaper Business Hotels, Grand Exhibition Centres like Germany / China.

    9) Super Highways + Rail Corridor freight Corridor Goods Movement. Roads make the country. Save time and fuel.

    10) Zero Defect Culture: To Achieve the best quality in a given resource. To achieve top quality we need the best machines, best raw material, training and attitude. Zero Defect Culture. To ensure the same we need to see safety of the worker, machine, environment and optimisation of time and resource. This might not be cheap but will prove the cheapest to the factory and country.

    11) To achieve Zero Defect Zero Effect, Abolish Tax on Machines be it import duty or VAT/GST. This will help the investors invest in top machines for best quality, optimised production and safety.

    12) Tax Exemptions in remote areas with facility of land, power, water, safety, road but it should work on SAP.

    13) Subsidise and Make SAP ERP popular as there are no chance of messing up the accounts like tally. Only clean companies can adopt SAP.

    Satyan Thukral

    Liked by 1 person

    • Great to see your comments. GST will consolidate tax, duty, cess etc., and hopefully compounding of taxes could a become a thing of the past. But from the current cumulative duty and tax collection along with cess etc., of 35% approximately (drawing from the example of specific industry referred to in the article since duty structure varies for different industries) to expect it to be dropped to about 16% may be wishful thinking. Also it may not be practical.
      Covering Service Tax in the GST is critical.
      Enforcing high-end ERP by subsidizing the purchase of that software would really work wonders.
      Large and efficient exhibitions such as seen in Cologne, Germany would be a boon. This is a big ticket expenditure. Perhaps could be done on PPP model.
      Encouraging importing high end machinery with incentives is more a necessity than just a desirable thing. Global market would become the automatic next step for the Indian SME manufacturers if they have access to the best machines. Zero defect manufacturing requires high-end machines. Subsidies is not a way of life, and this should be removed after a defined period of time.
      Current policy puts Indian manufacturers at a cost disadvantage over imported products in many industries. Really SAD.
      Vocational training centers will probably save the day, as you rightly mention and for the reasons you mention.
      A RBI scheme called CGTMSE with around 12% interest PA is available for SSI manufacturers and this is a collateral free loan. All Banks are mandated to issue this loan to the deserving but who is deserving is left for the bank to decide. So, they do not give out this loan in most cases. Enforcement of issuance of this scheme is needed. RBI has not reimbursed the insurance amount to various banks which followed this scheme and suffered losses in some cases. So they cannot be blamed completely.
      These are all but a few issues that have been discussed. Only comments like yours will draw out the many more issues that need discussion.
      Living in a constant state of fear for committing the sin of making in India should be removed. We are not like the Chinese who are all followers, thanks to being under Communist rule for centuries. Indians are all leaders. Every other person is capable of being an entrepreneur, given the right atmosphere.
      Therefore reforms of meaningful nature are the need of the hour.

      Like

      • We cannot become Europe / USA like Manufacturing Hubs in our life time as they have dedicated funds for education, Research and Development fund and Global Market.

        We cannot become China as they have large economies of scale and are now 20 years ahead of India.

        But we have one thing what these 2 countries do not have…our small workshops. We can be workshop of the world with customised solutions giving high end quality. In Europe / US this would be available at a premium and China is not interested in low volumes.

        Liked by 2 people

  4. Fresch, you definitely have a unique set of viewpoints there, though a bit murky, at bit enigmatic at times, I must say…It seems you may be a merger of Fresh and French in some new mitxeru…

    Like

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