Tax sops over subsidies: Why PLI scheme doesn't enthuse India Inc

Local sourcing of components and state monitoring keep firms away from production-linked incentives

India Inc is counting on tax sops to expand production rather than on subsidies from the government’s ambitious production-linked incentive (PLI) scheme. Though the scheme has been rolled out with a budget of close to Rs 2 trillion, as of now, there is no surge of enthusiasm for it.

“No one is going to manufacture for a prize, unless there is a commercial sense to expand,” said a top source at a consultancy firm, on the condition of anonymity. 

However, ministries have begun to announce the PLI winners and the pace will accelerate over the next few weeks. The department of pharmaceuticals has already announced the first set of companies eligible to get the incentives.

A survey carried out by the Federation of Indian Chambers of Commerce and Industry (Ficci) with Dhurva Advisors does not even mention the PLI scheme as something that industry is demanding from finance minister Nirmala Sitharaman in the run-up to the Budget. To the question “What should be the key focus area of the government to create a manufacturing ecosystem, including under the Make-in-India initiative?”, 28 per cent of the respondents mentioned tax incentives and tax certainty. As many as 61 per cent of the respondents flagged ease of doing business as their top demand.

Similarly, the Confederation of Indian Industry (CII) puts PLIs at the bottom of its list of pre-Budget recommendations. It, too, has sought tax certainty, which means “greater clarity in law, simplification of procedures and reduction of litigation”.

Yet more than tax reliefs, in Budget FY22 the government is banking on PLIs with key localisation requirements to expand manufacturing in the economy. The localisation commitment is also important because India has already raised customs duty on a wide range of items in the past few years, and the scope to raise duties further is limited.

 “In some sectors where the component industry is already in place, we shall expect the final manufacturers to do local sourcing,” said a government official involved in the drafting of the scheme. For the auto sector it could go up to 40 per cent, but could be lower in other sectors where components have to be imported.

To ensure that the localisation option sticks, the incentives for each sector have been sub-divided into those for component manufacturers. In the auto sector, for instance, of the Rs 57,042 crore incentive which is being rolled out, nearly 40 per cent shall be earmarked for the component sector, said an informed source. 

This means that the final product manufacturers will earn much less and this, too, has made them cool towards the scheme. In fact, a big reason why final product manufacturers in almost all sectors are not enthusiastic about PLI is that it requires them to source components from local manufacturers.

“The industry awaits implementation of basic custom duty with (continued) exemption to Special Economic Zone-based solar manufacturers and the Production Linked Incentive (PLI) scheme…we recommend that the government considers implementing tariff barriers for at least 4-5 years,” said Saibaba Vutukuri, CEO of Vikram Solar.  

For industry, the challenge is that while they can tweak a tax benefit in their balance sheet, the subsidies the government will give under the PLIs will also give it the right to monitor output levels achieved from the first year. Many companies are not keen to have this level of engagement with the state.

The other sore point for companies that expect to qualify for PLI is the base year for measuring how much additional production they have to generate above it. For all sectors, the measuring rod is FY18, although industry was pitching for an average of three years — from FY17 to FY19.

Most of the ministries have already fine-tuned their documents after clearances from the inter-ministerial Expenditure Finance Committee on the sum they can lay out for various sectors. Last week, the Niti Aayog also issued the necessary circulars in this regard.

Officers connected with the exercise said they were surprised by the reluctance of industry segments to go for the PLI scheme. The scheme is broadly based on a similar one that was in operation in China through the first decade of this century. But Indian companies, used to working with tax benefits revolving around investments made, are uncomfortable about being monitored for the levels of production they achieve.

While none has urged the government to substitute one with the other, in their pitch to the finance ministry, India Inc has asked for the older exemptions based on investments and capacity additions to continue. Assocham, for instance, has been battling for tax concessions for the textiles and electric mobility sectors in their pre-Budget discussions with the government. Both sectors qualify for PLIs, but the scheme was not part of the discussions.