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Making India A Global Manufacturing Hub

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The most ambitious effort to revive manufacturing was made in 2005, with passing of the Special Economic Zones Act (SEZs). The  Scheme envisaged reviving our  manufacturing output, attracting investments, creating jobs and providing a world-class infrastructure for businesses -- by adopting a 'Single Window Clearance' approach.

However, abrupt policy flip-flops, lack of clear policy guidance and substantially vittled down tax benefits have killed its initial charm and attractiveness. As a result -- manufacturing sector remains the Achilles' heel of our economy. 
Customs duty on DTA sales

To encourage India to become a global manufacturing hub for various items, particularly automobiles, DTA sales are inevitable. However, high customs duty levied on such domestic sales is a big deterrent. This custom duty on DTA sales gets levied even on value added in India - labour, material, etc. and is at a rate higher than FTA rates on certain items.

Customs duty should be levied on 'Duty Foregone Basis' on domestic sales from SEZ's and 'no customs duty' should be levied on valued added in India. Also the rate on such custom duty needs to be brought down to the level of lowest prevailing FTA rates.

Other Issues: With a view to allow consolidation of various existing units under one roof for efficient growth, the SEZ policy permitted transfer of second hand capital goods from existing DTA unit to SEZs. However, the income tax department created a deterrent by withdrawing the exemption if the quantum exceeds 20% of the total value of plant & machinery. Hence consolidation and growth have suffered.

The final nail in the coffin was the levy of MAT and DDT in the budget of 2011-12 which further undermined the Scheme and its very stability.

The Way forward…
There is a clear need for convergence of SEZs and the manufacturing policy and reinstatement of tax benefits. The future of SEZs will now be dependent on how the new Government rides this elephant.

The views expressed in this article are personal.

The author is M&A Tax Leader of PwC India
 


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