The transformation of the industrial landscape began with the National Manufacturing Policy (NMP) in 2011. A primary goal of this was to build an atmosphere of growth in the states. The Make in India Programme of 2014 was another step in this direction by the Government of India to encourage domestic manufacture.
In India, incentives are made available on two levels – Centre and State. The central government incentives are usually sector-specific and administered by the relevant ministry. They have pan-India applicability and may be availed irrespective of location of the investment, like the recently announced Production-Linked Incentives (PLI) Schemes.
While the PLI schemes have come at an opportune time, it is also pertinent to analyse the state level incentives. These are in addition to the production-linked incentives and are formulated around various costs of doing business in India.
State incentives, unlike central incentives, are granted through the respective state governments via industrial policies. A basket of incentives is made available to the investor. Depending on the geography, amongst other relevant regional factors, these policies also recognise focus/thrust sectors for the grant of additional incentives. Some of the popular ones include pharmaceutical, electronics and systems design manufacturing (ESDM), Information Technology (IT) and auto manufacturing and its components.
These incentives are available to domestic and foreign investors alike. New units, as well as existing units undergoing expansion are eligible to claim these incentives. The following parameters impact the incentives:
- Quantum of investment and/or employment generation: this will, in most cases, determine the category
- Location: Due to the governments’ aim for equitable development of all regions, the general norm is that lower the development index of the region, higher are the incentives available
- Business expenditure and sales patterns: to identify and quantify the relevant incentives.
- For the purpose of incentives, States categorise investments into:
- Micro, Small and Medium enterprises (MSMEs)
- Large enterprises
- Mega enterprises
In most states, mega enterprises have an option to apply for a customised package of incentives, over and above the policy, suited to their business needs. These are given based on the investment’s strategic and economic importance and may be fiscal and non-fiscal.
State incentives are generally given through a combination of the following:
- Capital-linked: This subsidy is given in the form of a cashback computed as a percentage of capital investment.
- Expenditure-linked: These subsidies are offered on recurring business expenses, such as reimbursement/exemption of power and water costs.
- Sales-linked: Generally forming the bulk of the incentives package, this subsidy was earlier linked to VAT/CST. Now, it is offered through a reimbursement of State Goods and Services Tax (SGST) or as a percentage of annual turnover. Given the linkage with SGST, the likely sales pattern takes on higher significance.
Owing to competitive federalism, the incentives policies across states aim to offer packages through which investors can recoup a substantial portion (30% – 100%) of their investment as a return. This allows for improved working capital management, as well as a faster payback period.
While fiscal incentives form a major part of state policies, non-fiscal incentives like ensuring availability of land, water and power, provision of external infrastructure, date extensions in fulfilling obligations etc. are also offered on a case-to-case basis. Further, States have also begun simplifying regulatory processes through the reduction of labour law compliances, easier project approvals etc.
The state incentives landscape is rapidly evolving. This goes hand in hand with the Central Government’s vision and the industrial needs. After the GST implementation, a wave of change is being witnessed in the incentives mechanism. There has been a rise in the delinking of incentives from SGST to transcend the barriers in incentives availment posed by the GST regime as evidenced below:
- Madhya Pradesh offers a formula-based subsidy
- Gujarat offers a fixed capital subsidy
- Karnataka, like the PLI Schemes, offers a turnover-based subsidy
- Tamil Nadu offers investors the option to choose incentives from one of four options: fixed capital subsidy, flexible capital subsidy (in conjunction with other factors), SGST reimbursement and a turnover-based subsidy.
In addition to central and state incentives, several other initiatives have been announced; notably the provision of a competitive income tax rate and several foreign trade related benefits. This has been done with the aim of better integration of India into the global markets.
Thus, a wide range of benefits are available to investors. There is much to gain from their availment, warranting a holistic look at the policies to ensure all incentives avenues are explored. The momentum generated by these initiatives may trigger the creation of a dynamic business ecosystem and yield long term economic benefits. This would set the tone for India to become a globally preferred investment destination.
(The writer is Partner – Indirect Tax, EY India)