Impact Of Specific Tax Policies On Make In India

Author: LawSphereX

Category: Taxation

Published: 2026-08-23T20:17:34.241679+00:00

Updated: 2026-08-26T17:11:12.857+00:00

IMPACT OF SPECIFIC TAX POLICIES ON MAKE IN INDIA

Tapasya Singh, LLM, Amity University, Noida

ABSTRACT

The Make in India initiative, launched in 2014, as part of a wider set of nation- building initiatives, sought to leverage international investment and promote indigenous manufacturing to turn India into a worldwide manufacturing powerhouse. However, the efficacy of this ambitious initiative is contingent upon various factors, including the prevailing tax policies. This paper elaborates the impact of recent tax policies on the Make in India initiative, focusing on their implications for domestic manufacturing, foreign investment inflow, and overall economic growth. Moreover, it assesses the extent to which alterations in tax regulations have influenced the competitiveness of Indian manufacturing vis-à-vis other global players. This study offers to provide a comprehensive understanding of the intricate relationship between tax policies and the realization of the Make in India vision.

Keywords: Make in India, Foreign Investment, Manufacturing Sector.

I. Introduction

With more than 1. 21 billion people (2011 Census), over two-thirds of whom are of working age, India has the world's second largest population and has the world's third highest GDP in purchasing power parity terms. This suggests that India will be a supply of human resources for most of the world's ageing, industrialised economies in the coming decades. With a new government in place, India seemed to be undergoing a secular expansion period, with an increased focus on equality. The more of the nation's population is incorporated into the commercial mainstream, the more prospects for growth and less gaps there will be in terms of the economy1. The Indian government is making ongoing efforts through the facilitation of investments to carry out the Make in India strategies and find investors who might be interested.

Indian Missions Abroad and State Governments are receiving assistance in arranging events, conferences, expositions, and other advertising campaigns to encourage investment in the country under the Make in India banner. Investment Outreach operations take place out to enhance international cooperation for encouraging FDI and improving the ease of conducting enterprise in the country. Furthermore, India saw its largest ever yearly FDI inflow of US $81. 72 billion (temporary estimate) for the fiscal year 2020-21, in contrast to US $ 45. 15 billion in 2014-2015. During the past seven fiscal years (2014-20), India experienced FDI inflows totalling US$ 440. 01 billion, a figure that represents 58% of the FDI that was reported over the last 21 years (US$ 763. 58 billion)2. Steps made to increase Ease of Doing Business include simplifying and rationalising the current procedures.

Because of the actions taken to strengthen the country's investment climate, India has risen to 63rd place in the World Bank's Ease of Doing Business ranking, according to the Doing Business Report (DBR) 2020. This is being driven by improvements in the processes of establishing a business, paying taxes, trading internationally, and addressing insolvency. 1 Godwa M. , Ramchandra. , Ravi M. V. , “Enabling Make in India through Tax Policy- An Exclusive Study” 4 IJMSS 25-34 (2016).

2 Initiatives under “Make in India” and “Startup” Programmes, India, available at:

https://www.pib.gov.in/PressReleasePage.aspx?PRID=1738170 (last visited on March 09, 2024).

In recent times, the government has taken various efforts, in addition to continuing policies, to increase local and foreign investments in India. These consist of the National Infrastructure Pipeline, corporate tax cuts, liquidity relief for NBFCs and banks, and policy steps to stimulate local manufacturing. The governing body of India has also fostered the local manufacturing of consumer products through public procurement orders, the Phased Manufacturing Programme (PMP), and schemes for production-linked benefits of several Ministries. The article highlights impact of specific tax policies under Make in India. For the purpose, this article will introduce the concerned topic and the effectiveness of tax incentives under make in India, the impact of GST on sectors targeted by make in India.

Moreover, some of the key points that will be discussed in this article are section 115BAB, tax exemptions, economic reforms, manufacturing growth, scheme for promotion of manufacturing of electronic components. Lastly, the report will suggest some key changes that might be adopted by the policymakers to make the policy more effective. II. Effectiveness of Tax Incentives under Make in India

Section 115BAB - Corporate Tax Rate for New Manufacturing Companies The authorities have implemented an advantageous tax structure for newly established manufacturing enterprises. The Taxation Laws (Amendment) Ordinance, 2019, enacted on September 20, 2019, included Section 115BAB, which provides a low tax rate of 15% (plus penalty and cess) for newly established manufacturing enterprises. This is carried out by encouraging new industrial startups3. A domestic corporation that meets the standards outlined in (2) below may gain advantages

from Section 115BAB. Domestic companies comprise those created and incorporated in India. The allowance is accessible since fiscal year 2019-20 (AY 2020-21)4. Benefit of a Low Corporate Tax Rate ● Deduction under section 10AA for units in Special Economic Zone. 3 Neelanjit Das., “Concessional corporate tax rate of 15% for eligible ‘start-ups’ has not been extended beyond March 31, 2024” The Economic Times Feb. 01, 2024.

4 Section 115BAB - Corporate tax rate for new manufacturing companies, India, available at:

https://cleartax.in/s/section-115-bab-corporate-tax-rate-new-manufacturing-companies ((last visited on March 05, 2024).

● Deduction for additional depreciation under section 32 and investment allowance under section 32AD towards new plant and machinery made in notified backward areas in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal. ● Deduction under section 33AB for tea, coffee, and rubber manufacturing companies. ● Deduction towards deposits made towards site restoration fund under section 33ABA by companies engaged in extraction or production of petroleum or natural gas or both. ● Deduction for expenditure made for scientific research under section 35. ● Deduction for the capital expenditure incurred by any specified business under section 35AD.

● Deduction for the expenditure incurred on an agriculture extension project under section 35CCC or on skill development project under section 35CCD. ● Deduction under Chapter VI-A in respect to certain incomes, which are allowed under section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA. ● Set-off of any loss carried forward from earlier years if such losses were incurred in respect of the aforementioned deductions. ● Deduction for depreciation under section 32, except the additional depreciation as mentioned above.

The other key tax incentives available specifically to companies in the manufacturing sector include the following: • Additional 30% deduction for new employee costs for three years (conditions apply); • Tax-free export of goods with no indirect taxes; • Duty exemption or deferral on capital goods and inputs used in manufacturing; • Reimbursement of state-level GST through refund, exemption, or loan (calculated on a gross or net basis based on state, fixed capital investment, and project size); - Refund

or exemption of stamp duty on industrial land sales or leases. Tax Exemption on Investments above Fair Market Value DPIIT-recognized start-ups qualify for exemption from tax under Section 56(2) (vii b) of the Income Tax Act whenever they obtain an amount in exchange for distributing shares that equals the Fair Market Value of those shares. To be eligible for the exemption under Section 56(2) (vii b) of the Income Tax Act, the start-up needs to submit a written statement in Form 2 with DPIIT, according to announcement G. S. R. 127 (E). As of July 12, 2021, notification of completion of statement in Form 2 was mailed to 4,372 organisations5.

Tax Exemption to Start-ups for 3 Years Section 80-IAC of the Income Tax Act permits the taxpayer being assessed to deduct up to 100% of the profits and earnings from a qualified business for three continuous years of assessment out of seven, depending on specified circumstances. The Finance Act of 2020 alters section 80-IAC of the Income Tax Act to provide that the deduction under the same section 80- IAC shall be granted to a qualifying start-up for a time frame of three consecutively appraisal years out of ten years commencing from the year in which it is founded. To get those advantages, a Start-up needs to first get a Certificate of Eligibility obtained from the Inter-Ministerial Board (IMB). As a result, 387 start-ups have been granted income tax exemptions till June 2021.

Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors ● Qualifying spending on capital includes plant, equipment, and machinery, as well as services, the transfer of technology, and research and development (excluding land and buildings). ● Can claim 25% of capital outlay as straight cash reimbursement6.

5 Initiatives under “Make in India” and “Startup” Programmes, India, available at:

https://www.pib.gov.in/PressReleasePage.aspx?PRID=1738170 (last visited on March 09, 2024). 6Make in India: Incentive schemes, India, available at: https://assets.kpmg.com/content/dam/kpmg/in/pdf/2020/12/make-in-india-incentive-schemes-electronicsmanufacturing.pdf (last visited on March 09, 2024).

● Private limited companies, LLPs, sole proprietorships, and public limited companies registered in India are eligible to apply. ● Used/second-hand/refurbished assets (including R&D) cannot exceed 20% of allowable expenditure. ● Eligible investments include new business units, capacity expansion, and modernization/diversification of existing units. Cost of doing Business by MSME Due to legal requirements and great accountability, the informal sector of MSMEs with a large workforce would transition to the formal sector. Small industries will hire information technology-savvy tax advisors, legal consultants, and managers with managerial bandwidth to assure compliance with the new system7. This would boost their operating expenses.

Rapid tuning of the new GST system following adoption, as well as a lack of thorough knowledge concerning the newly implemented system by its makers, would create temporary unpredictability. This could trigger an extension in transferring on benefits to the client. Lower freight and raw material prices will improve MSME cost competitiveness. Because of the lack of interstate tax complexity, the market for MSMEs will expand. However, MSMEs that offer to end users would be disadvantaged since GST will be paid on supplies that are not eligible for input credit, resulting in higher product costs. To comply with the GST regime, manufacturers must upgrade their accounting software and enterprise resource planning systems. This move has also had a negative effect on MSMEs.

To summarise, there is a hurdle in immediately neutralising the negative effects with the favourable ones, which may take time. Manufacturing Growth The Indian economy's statistics have shown significant progress in a few areas, including foreign direct investment (FDI), fiscal deficit, inflation, and stock indices. FDI in manufacturing rose from 0. 3 billion in 2012-2013 to $20. 3 billion in 2016-2017. The implementation of demonetization in 2016 and GST in 2017 had an immediate to medium- 7 Ravindra Ojha & Prem Vrat, “Implications of Goods and Services Tax reform on the Make in India initiative: A system dynamics perspective” SRBS 13 (2018).

term impact on the industry. From a system perspective, there are six significant reasons associated with the current manufacturing growth position8: ● Low consumer demand has led to a decrease in manufacturing capacity utilisation from 74.6% in 2015-2016 to 71% in Q1 2017-2018. ● Subsequent financial turmoil, such as demonetization and GST, have had significant consequences in the short term. ● Farmers' unstable and low wages are negatively impacting job opportunities. ● Banks under pressure due to non-productive asset constraints. The growth rate of total credit as a proportion to MSME has declined from 29% in 2013-2014 to 4% in 2016-

2017 in offering credit to the MSME sector, which accounts for 33% of industry gross

value additions. ● The job crisis has been exacerbated by labour-intensive micro, small, and medium companies (MSMEs), sluggish growth in the construction industry, and decreased private investment. Gross fixed capital formation, an effective metric of investment growth, declined from 34. 3% of GDP in 2011-2012 to 29. 8% in 2015-2016. ● The export-to-GDP ratio has decreased from 25. 4% in 2013 to 20% now due to rivalry from nearby Asian countries. Investment Growth During the first quarter of the year, the impact of GST on the manufacturing sector has been negative, which is expected to delay the rebound of investment activity. However, increasing investment takes time to produce higher productivity and efficiency in production9. Economic Reforms The Make in India programme aims to make India a prominent investment destination.

However, before determining whether the flowery words will come true or not, it is critical to

8 Supra note 7.

9 Supra note 7 at 3.

understand what needs to be accomplished and, more significantly, how. Today, making India a major investment destination necessitates a methodical approach that includes both policies and institutions. Existing systems and processes require considerable adjustments to remove structural rigidities, improve the quality of institutions and infrastructure, and create a favourable climate for encouraging technological progress10. Union officials must have a clear knowledge of what needs to be done and work with state governments to develop strategies for the journey. The Indian government's most essential job is to transform the character and quality of the country's institutions. Indian labour rules, for example, have limited labour-intensive industrialization, resulting in the decline of labourintensive industries such as textiles and leather.

However, as labour gets more expensive in China, India can regain some lost territory. India also has a significant infrastructure deficit. To solve this deficit, the government must increase public investment in infrastructure. The central government's investment budget is condemningly low, although the administration did well to accelerate capital expenditures in the first quarter. Improved revenue collection through indirect taxes may also boost investment spending. However, the government must update the model concession agreements for publicprivate partnerships. To minimise crowding out in capital markets, private investors want low interest rates, which means that the fiscal deficit should be kept under control. With this in mind, increasing public infrastructure investment implies raising the tax-to-GDP ratio.

The government must address price regulations, which continue to impede allocative efficiency and production. Even after 24 years of liberalisation, many goods and services' prices are decided by administrative roles rather than market forces. These regulations have distorted resource allocations at different levels and increased subsidies. III. Impact of GST on Sectors Targeted by Make in India

Freight Flow on Highways Checkpoints worked as speed breakers for goods carriers, offering a sense of discipline and 10 Sana Moid, “The Challenge of Reforming Indian Tax System for Enabling Make in India” 6 FIIB Business Review 12-17 (2017).

safety. With fewer warehouses and checkpoints, goods carriers can drive faster and cover more distance each day, resulting in lower transportation costs and lower pollution levels. Increased manufacturing growth without corresponding highway construction may lead to a rise in goods carrier population on highways, thereby increasing safety issues and environmental pollutants over time11. Export Business Lower expenses for operations and greater ease of doing business would lead to higher export volumes. The GST regime is likely to entice multinationals to invest in India, particularly in logistics, highway development, and e-commerce12. Other Impacts Motor spirit is not included in the GST, yet it accounts for a significant portion of the transportation industry, and its exclusion is a barrier to expansion.

Taxes paid on petroleum products would not be accessible as credit, providing no relief to the connected electricity and logistics companies. GST will be credited to states where supplies are consumed and not the producer state where central sales tax is included on interstate taxes. This would reduce the earnings of producer states. As a result, they would discontinue the incentive programme. This equal playing field strategy for all would lead to competition on the one hand, but balanced industrial growth at the national level would suffer a setback13. IV. Conclusion and suggestions

To align with the "Make in India" programme, specific tax incentives must be granted to investors, which will go a long way towards providing much-needed impetus to the manufacturing industry. Several of them are listed below14: In toll manufacturing, one business delivers raw materials (or semi-finished goods) to a third party, who then offers the remainder of the services (manufacturing). Typically, the third-party company will already have equipment and organisational structures in place, and they can

11 Supra note10 at 3.

12 Ibid.

13 Ibid.

14 Supra note 10 at 12.

provide subcategories of manufacturing processes for the first company for a price or toll. To foster India's expansion as a manufacturing hub, domestic tax regulations must prevent foreign principals from establishing a taxable presence in India as part of a toll manufacturing arrangement with Indian manufacturers. Under transfer pricing restrictions, MNCs should specify a realistic cost-plus margin for toll manufacturing/contract manufacturing arrangements with their Indian manufacturing units15. With the elimination of the MAT exemption, operations related to the establishment of SEZs and SEZ units have slowed dramatically. Reestablishing the exemption will greatly encourage non-resident investors to produce items in a SEZ, offering an extra push to the "Make in India" programme.

At present, approved industrial enterprises engaging in development of infrastructure enjoy the right to a deduction according to Section 80-IA of the Act. To promote further investment in the business that makes defence and aerospace machinery, the list of areas eligible for deduction under Section 80-IA should be broadened to include units responsible for the making of defence and aerospace machinery. Furthermore, it would make India resilient regarding defence tools, which is presently reliant on other industrialised economies16.

15 Supra note 10 at 13.

16 Supra note 10 at 14.