The ongoing pandemic has hit the businesses and the Indian economy hard and therefore, businesses need an opportunity which aids, supports and incentivises the sector and manifests the ‘Atma Nirbhar Bharat’ ideology.
With an aim to remove sectoral disabilities, creating economies of scale, enhancing exports, creating a robust component ecosystem and employment generation, the Government at the helm has announced PLI schemes for 13 sectors to act as a growth enabler for manufacturing sector. While nine schemes have already been approved in the cabinet, four sectors await their turn – Automobiles and Auto Components, Specialty Steel, Textile Products: MMF segment and technical textiles and Advanced Chemistry Cell (ACC) Battery.
What makes PLI schemes attractive both for the country and businesses is the fact that it aims to scale up the key sectors, promote local value addition and generate employment opportunities- thereby putting India on the global manufacturing map. While most schemes require that plans for domestic value addition are declared, as the incentive under the PLI schemes is not linked to exports/ value addition, the fabric of the PLI Schemes is largely WTO compliant.
Given that each sector works on a pre-designated financial incentive limit, there are certain challenges that are associated with the same – the companies have to compete against each other to apply for this benefit and secondly, no additional benefits are given to a company that is overachieving its targets and therefore, such companies are not incentivised to exceed their projections. Another issue that though in parallel (and in small measure) are being taken care of by the Government by reviewing exemptions/concessions, PLI may not help when cost comparisons are made between imported goods and locally manufactured goods.
The latest introduced scheme for the ‘white goods’ applies to air-conditioners, LED lights which is brought in effect from FY 2021-22 till FY 2028-29. The sector till now has been dominated by imports from South East Asian countries with players assembling units in India.
“The scheme extends an incentive of 4% to 6% on incremental sales (net of taxes) over the base year of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years subsequent to the base year and one year of gestation period.”
The applications for the scheme having a financial limit of INR 6,238 is open between June 15, 2021, to September 15, 2021. The scheme guidelines provide that preference under the scheme will be given to players who are manufacturing components or sub-assemblies which are not manufactured in India with sufficient capacity.
The scheme guidelines clarify what investments will be included for the purpose of the scheme. As per the guidelines, the machinery and equipment’s should be purchased/leased in the name of the applicant. Expenditure on consumables and raw materials used for manufacturing shall not be considered as an investment. Capital expenditure incurred for R&D is allowed to be included, however, the revenue expenditure is not to be included in the same. What is also not covered, is the investment in land and building (including factory building or construction).
The guidelines also restrict the use of second hand, used, refurbished plant, machinery, equipment, utilities to manufacturing the eligible product. While the restrictions seem logical given that the main intent of the scheme is to increase investment in India, given the effect that the pandemic has had on businesses and that it comes with no expiry date, it may be a trite bit difficult for the businesses to arrange for the investment at this time.
“Being a fund limited scheme, the value for incentives is capped at five times of the cumulative threshold investment in the previous year for Air Conditioners and 6 times for LED target segments. Amongst other conditions, the benefit of the scheme is not available to mere assemblies or to value-added re-sellers – clearly demonstrating that the thrust is on encouraging manufacturing in India.”
Being a fund limited scheme, the value for incentives is capped at five times of the cumulative threshold investment in the previous year for Air Conditioners and 6 times for LED target segments. Amongst other conditions, the benefit of the scheme is not available to mere assemblies or to value-added re-sellers – clearly demonstrating that the thrust is on encouraging manufacturing in India.
Given the financial incentive limit and window for filing applications, it is imperative that businesses act fast and assess their eligibilities to file the application. How much investment in the manufacturing sector will the scheme actually generate is something that remains to be seen – given that the sector has tremendous potential.
This article was originally published in The Economic Times on 19 June 2021 Co-written by: Rajat Bose, Partner; Ankita Bhasin, Principal Associate. Click here for original article
Contributed by: Rajat Bose, Partner; Ankita Bhasin, Principal Associate
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