Eco Survey pitches tax reforms & skill upgrade for 'Make in India'

Document states that Indian tax policies currently penalise domestic manufacturing

For Economic Survey 2014-15, Chief Economic Advisor (CEA) Arvind Subramanian has adopted a prescriptive approach to realise the government’s ‘Make in India’ vision. The Survey said domestic manufacturing under the ‘Make in India’ initiative should be promoted by removing “negative protectionism”.

Mincing no words in saying current tax policies in India were effectively penalising domestic manufacturing, the Survey pitched for the removal of exceptions to countervailing duties (CVD) and special additional duties (SAD). “There is a response that will help manufacturing and the ‘Make in India’ initiative without being as difficult as improving the business environment and as controversial and expensive as the industrial policy or protectionist response — eliminating exemptions in the CVD and SAD levied on imports,” it said.

CVD is levied to ensure parity of duty imposed on domestic manufacturers, though it is not applicable to a range of imports. This, the Survey said, led to a loss of Rs 40,000 crore to the government’s finances.

“India’s current indirect tax system sometimes favours foreign production over domestically produced goods,” it said, touting a goods and services tax as a way to remove this anomaly. It also pitched for the removal of CVD exemptions.

The Survey used five key parameters to identify the sectors that promoted domestic manufacturing — productivity, growth (national and international), resource attraction, unskilled labour and tradability of the sector. “Telecommunications and finance are like registered manufacturing in being highly productive and dynamic,” the Survey said. These sectors were skill-intensive, ones in which India lacked a comparative advantage.

Construction scored fairly high on these parameters but low on tradability.

To promote domestic manufacturing, skills should be upgraded rapidly for labour-intensive sectors, the Survey said. According to the Labour Bureau’s Indian Labour Report, 300 million youth will enter India’s labour force by 2025 and in the next three years, Indians will account for 25 per cent of the world’s workers.

Population projections indicate by 2020, the global economy might see a shortage of youth and India will be the only country with youth surplus of 47 million (Labour Bureau report, ‘Education, Skill Development and Labour Force - 2013-14’).

“The main issue to address is not just providing employment but increasing the employability of the labour force in India,” the survey said.

In a report, the 14th Finance Commission had said conditions for manufacturing would improve through rapid skill upgrade, making regulations and tax less onerous, building infrastructure, reforming labour laws and enabling connectivity.
POINTS TO BE NOTED

• CVD is levied to ensure parity of duty imposed on domestic manufacturers, though it is not applicable to a range of imports
• According to the Survey, CVD led to a loss of Rs 40,000 crore to the government’s finances
• India’s current indirect tax system sometimes favours foreign production over domestically produced goods and a goods and services tax as a way to remove this anomaly
• The 14th Finance Commission had also said that conditions for manufacturing would improve through rapid skill upgrade, making regulations and tax less onerous, building infrastructure, reforming labour laws and enabling connectivity