Notably, a competitive corporate tax rate has incentivized investors to look at India amidst all its other offerings. However, contrary to market expectations, the Government did not extend the sunset date as it had previously, for newly set up manufacturing companies to avail the benefit of the concessional corporate tax rate. This in turn has impacted many projects that were under assessment or just shy of commencing production. Considering the capital-intensive nature of these projects, there is a time lag between setting up the company and commencing production.

Therefore, the hope was that a renewal of such tax benefit would at least be extended for up to two or three years. In fact, the industry had recommended an expansion of the concessional corporate tax regime for manufacturing companies to expressly include expansion of manufacturing facilities or installation of new plant or new product lines, coverage of incidental or auxiliary activities such as trading, maintenance services, etc. and relaxation in gross basis taxation for non-manufacturing income. Against this backdrop, the non-extension of the concessional tax rate for manufacturing was disappointing even for Indian medium and small enterprises.

Reportedly, in recent years, some big names have set up manufacturing units or amped up their investments in India including Micron, Foxconn, Panasonic, Intel, Siemens and Carl Zeiss. India has also demonstrated its commitment to work on ease of doing business in India though digitalization, simplification of procedures and streamlining government approvals.

Now, that the proof is in the pudding, other multinationals are also exploring India seriously. Yet, India continues to face stiff competition from southeast Asia with Malaysia, Vietnam, Thailand, and Taiwan having a notable advantage given their long-standing presence in global supply chains.

As such, there may not be any room for complacency. A competitive corporate tax rate that is compliant with the global minimum tax norms could be an important variable in the mix for multinationals that are evaluating multiple manufacturing destinations. Even on the domestic front, one cannot ignore the growth and development of the MSME sector, that has been a beneficiary of such concessional tax rate. A high return in a capital intensive industry can promote entrepreneurship in the manufacturing sector.

As the honourable Finance Minister recently noted, India must keep pushing its manufacturing sector “to increase its share in global value chains and become self-reliant with the help of government policies”. Spurring the manufacturing sector is key to continued investment inflows, technology transfer, job creation, innovation, reduced reliance on imports, improving India’s trade balance and long-term economic wellbeing. Indeed, a revival of the concessional corporate tax rate for newly set up manufacturing companies would be a step in the right direction to keep the momentum going.

This article was originally published in Business Today on 22 July 2024 Written by: Gouri Puri, Partner. Click here for original article

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