The Union Budget 2024-25, presented on July 23, has laid out an ambitious framework to invigorate India's manufacturing sector. This year's budget emphasises on revitalising the industry through strategic investments in infrastructure, skill development, and support for small and medium enterprises, say CA Pramod Achuthan, CA Neeraj Menon, CA Prasad Kulkarni, CA Shweta Patni, of Ernst and Young LLP.

Over the past years, India has been actively fostering the expansion of the manufacturing industry as a crucial catalyst for the economy, positioning it at par with its global peers. 

The Micro, Small and Medium Enterprise (MSME) sector has emerged as a very important sector of the Indian economy, contributing significantly to employment generation, innovation, exports, and inclusive growth of the economy. The MSMED Act, 2006, was enacted to provide an environment for promotion and development of the sector by way of defining MSMEs, putting in place a framework for developing and enhancing competitiveness of the MSME enterprises, ensuring flow of credit to the sector and paving the way for preference in Government procurement to products and services of the MSMEs, address the issue of delayed payments, etc.

In this backdrop, the Hon’ble Finance Minister revealed the Union Budget 2024-25 (‘Budget’) on 23 July bringing in a roadmap to Viksit Bharat with policies aimed at strengthening the manufacturing sector and specifically focusing on Micro, Small and Enterprises (‘MSME), employment generation and skilling, infrastructure and research and development. 

The following announcements were made to boost the manufacturing sector:

A. Policy:

In line with the requirement laid out in the Economic Survey regarding the need to create 7.85 million jobs annually in the non-farming sector, the Finance Minister announced the Prime Minister’s Package for Employment and Skilling with a significant outlay of Rs2 trillion. The package primarily consists of following three schemes: 

Apart from the above, the package also consists of a comprehensive scheme for providing internship opportunities in 500 top companies to 10 million youth in five years and plans to upgrade 1,000 Industrial Training Institutes (ITIs). These schemes coupled with existing income-tax benefit under section 80JJAA, provides additional weighted tax deduction (spread across 3 years) of 90% of salary paid to newly hired employees is likely to incentivise and boost the manufacturing sector.  

A package was formulated covering financing, regulatory changes and technology support to help them grow and compete globally. The policy includes:

• Credit Guarantee Scheme for facilitating term loans for purchase of machinery and equipment without collateral or third-party guarantee 

• New credit assessment model for MSME credit with divergence from traditional model focused on asset or turnover criteria and linking it to the digital footprint scoring mechanism

• Limit for Mudra loans enhanced to Rs2 million from Rs1 million

• Enhanced threshold, from existing Rs5 billion to Rs2.5 billion, for mandatory onboarding in Trade Receivables Discounting System (TReDS). This will expand the outreach of the system and will be crucial for facilitating MSMEs to unlock their working capital by converting their trade receivables into cash. 

• Development of ‘plug and play’ industrial parks in 100 cities along with sanctioning 12 new industrial parks under the National Industrial Corridor Development Programme

• Rental housing with a dormitory type accommodation for industrial workers will be facilitated in the Public-Private Partnership mode with support and commitment from Anchor Industries.

• Additionally, SIDBI i.e. Small Industries Development Bank of India will open new branches to reach and provide credit to all MSME clusters in 3 years. 24 Branches are expected to be opened during the year to extend this facility.

• Scope of obtaining lower deduction/collection certificates:

Taxes to be deducted / collected at source at 0.1% on sale / purchase of goods exceeding Rs 5 million will be covered under the ambit of provision related to lower deduction / collection certificates. It will reduce the blockage of working capital, especially in case of loss-making companies and thereby help in allocation of resources.

• Focus on reducing litigation and providing certainty:

The Finance Minister mentioned in her Budget speech about a plan to focus in the next 6 months on comprehensive review of the Income-tax Act to make it concise, lucid, easy to read and understand. This will reduce disputes and litigation, thereby providing tax certainty to the tax- payers. It will also bring down the demand embroiled in litigation. 

Apart from the above, following are other key litigation related amendments proposed:

• Reduction of time limit for initiating reassessment proceedings from 10 years to 5 years where income escaping assessment is Rs5 million or more.

• Vivad Se Vishwas Scheme 2024: It is a one-time opportunity to settle pending disputes which may help facilitate ease of doing business and reduce industry’s tax litigation burden.

• Increase in the monetary limit for filing of appeals by the Department before the Income-Tax Appellate Tribunal, High Court and Supreme Court likely to reduce litigation on small matters

• No prosecution under section 276B of the Act if TDS has been paid to the credit of the Central Government at any time on or before the time prescribed for filing TDS statement.

• Rationalisation of capital gains tax provisions

Capital Gains Tax provisions are proposed to be rationalised as under with effect from 23 July 2024:

• Period of holding for determination of LTCG vs. STCG simplified - 12 months (for listed securities) and 24 months (for others). Period of holding for sale or undertaking in a slump sale still remains at 36 months and appears to be a miss-out. 

• Tax rate for LTCG proposed at 12.5% on all categories of assets (currently, LTCG taxable at 20% for residents and 10% for non-residents as well as residents selling securities with payment of STT)

• Indexation will not be applicable on cost of acquisition henceforth

• Tax rate for STCG on sale of certain securities (with payment of STT) proposed to be increased from 15% to 20%

Others:

• Some of the TDS rates have been reduced, e.g. TDS on commission payment under section 194H is reduced from 5% to 2%

• Corporate tax rate for foreign companies reduced from 40% to 35% (plus applicable surcharge and cess) with effect from 1st April 2024

 

• Withdrawal of 2% Equalisation Levy (‘EL’) on e-commerce supply of services provided or facilitated by non-residents on or after 1 August 2024

• Capital gains tax exemption for corporate gifts removed. Exemption for gifts now proposed to be made applicable only to individuals and HUFs.

• Buy back of shares also to be taxed as dividend income, thus plugging the tax planning used by some of the companies due to tax arbitrage between buy back tax and dividend tax, especially for high net worth promoters.

Starting FY 24-25, a new process for handling non-payment or short payment of taxes, erroneous refunds, or incorrect input tax credit claims would be established. Notices under this section must be issued within 3.5 years, and orders passed within a year (with a 6-month extension possible). Taxpayers would now have 60 days to settle dues, and taxes paid are eligible for input tax credit, subject to conditions. Penalties would now be levied in a staggered manner.

The pre-deposit cap for appeals would be reduced to Rs 200 million for both CGST and SGST before the Appellate Authority, and to 10% of the disputed amount (capped at Rs 200 million for both CGST and SGST) before the Appellate Tribunal. The appeal filing deadline would now be three months from the order date or a government-specified date. Further section 128A offers a waiver of interest and penalty on certain demand notices for FY 2017-18 to 2019-20.

The timeline to claim ITC for invoices/debit notes from July 2017 to March 2021 would be extended to November 30, 2021. Further for reinstated registrations (i.e. post revocation of registration cancellation), the deadline would be later of the return filed up to 30th November of the subsequent financial year or within 30 days from the revocation order.

The time of supply for services under reverse charge where the recipient is required to raise invoice, would be earlier than the payment date or the date of invoice issued by the recipient, not exceeding the timeline to be prescribed.

Proposals include setting a deadline for anti-profiteering applications, restricting refunds on zero-rated goods subject to export duty, excluding certain alcohols from GST, allowing the GST Council to regularise non-levy or short levy of GST, and defining co-insurance premium apportionment as neither a supply of goods nor services.

Changes in the Basic Customs Duty (BCD) rate structure are proposed to support domestic manufacturing and export competitiveness. Effective July 24, 2024, BCD rates are increased for certain plastics, consumer goods, and chemicals, while reduced for products in agriculture, aquafarming, marine, minerals, textiles, leather, cancer drugs, precious metals, medical equipment, and renewable energy.

The customs duty rate structure would be reviewed, with exemptions phasing out gradually, maintaining some exemptions with sunset dates. Goods imported for job work related to export orders are exempt until March 31, 2026. The time limit for duty-free re-import of goods under warranty is increased to five years, extendable by two years.

• Proposals include accepting various proofs of origin under trade agreements and empowering the government to specify operations not permitted in a warehouse.

• The much-awaited Product Linked Incentives for Toys and Footwear and Leather manufacturers with an expected allocation of Rs34.89 billion and Rs26 billion respectively have not been approved by the cabinet during the budget. This incentive would significantly boost the sales for the two sectors leading them to Aatmanirbhar Bharat, but they now await further announcements.

Additionally, special provisions were announced for the development of Andhra Pradesh and Bihar.

These amendments are designed to provide clarity, reduce litigation, and support economic growth by aligning with global trade practices and promoting domestic industries.  One of the misses in the Budget is the extension of the 15% Concessional Tax Rate regime for new manufacturing entities and it seems the Government does not plan to re-introduce the same. 

The Budget has strategically prioritised the manufacturing sector along with the infrastructure, employment and skilling development. It has fostered an attractive climate for investment, innovation, and industry scaling which will give an impetus to the manufacturing sector and aligning with the broader goals of enhancing productivity and competitiveness in the global market.

To summarise, the Government has taken focussed steps on manufacturing, skilling, employment, etc which should provide an upliftment to the sector and pave the way for sustainable growth in the years to come.

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The Article is written by CA Pramod Achuthan and CA Neeraj Menon, Partner at Ernst and Young LLP. It is co-authored by CA Prasad Kulkarni, Director and  CA Shweta Patni, Senior Manager at Ernst and Young LLP.