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 20^th 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companies were already raking in huge profits and as with all subsidies in our country, once given, it has never been withdrawn.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???