The benefits of manufacturing in India: tax benefits and subsidies
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The Indian government is working hard to create a favourable business climate for foreign investors that want to set up a manufacturing unit in the country. It has created a whole bunch of tax benefits and subsidies. Cheap land for industrial purposes is being made available on a large scale and the infrastructure, including roads, train connections and ports, is being improved considerably. In addition, the Indian government has implemented a lot of financial incentives in recent years for companies that manufacture in India.
Make in India
The Make in India programme, which was introduced in 2014, offers tax incentives that are designed to attract investors in the Indian manufacturing sector and at the same time grow the Indian economy. The programme offers tax exemptions, rebates and deductions, among other things. Here are some of them:
Activity-based incentives
These incentives are intended for all manufacturers and producers who produce enough. They offer a tax deduction of 150 percent on research & development, combined with financing for the import of materials required for these activities. Eligible manufacturers and producers are also eligible for an exemption from paying import duties.
Export incentives – Special Economic Zones
These incentives are interesting for manufacturers who are located in a special economic zone (SEZ). The location offers exemptions from import duties, VAT, excise duties and service taxes. These incentives are incredibly attractive to exporters as they can significantly reduce their operational, transportation and sales costs. These schemes also offer the opportunity to deduct 100 percent of export profits for the first 5 years of establishment. This drops to 50 percent for the next 5 years and remains 50 percent for another 5 years if the profit meets certain conditions, including depositing it into a special account for the purchase of production equipment.
Industrial Incentives
These incentives are available to specific industries such as pharmaceuticals and food. The schemes offer tax deductions or direct reimbursement for many costs incurred by the industry, such as material storage.
Investment-based incentives
The government offers a capital subsidy of 20 to 25 percent and a subsidy of 50 to 75 percent of the total project cost for companies that meet the investment criteria.
State Incentives
These incentives can vary greatly from state to state. The specific measures offered by a state depend on the clusters that are located in the state and the investment potential. In many cases, these are exemptions or permissions on registration fees, stamp duties, property taxes, etc. States also often offer rebates or exemptions on utility costs or subsidies for equipment.
Corporate Income Tax
Corporate income tax for manufacturing companies was reduced from 30 percent to around 25 percent in 2019. And this rate could drop even further, to 22 percent, if companies do not opt for other special tax regimes. Manufacturing companies that are set up and start production before March 2024 can benefit from an even lower tax rate of just 17 percent in their first year. You can read all about setting up a manufacturing base in India and the administrative and tax aspects involved in this in our special manufacturing guide for European companies.
PLI Schemes
In 2020, the Indian government introduced ‘Targeted Production Incentives’ (PLI) in specific sectors. Both local and foreign companies can apply for the PLI schemes in every sector. The incentives are aimed at creating local industrial capacity, attracting foreign direct investment and creating employment opportunities across all disciplines. Companies can apply for a PLI scheme in the following sectors:
- Pharmaceutical sector: The PLI scheme in this sector has a term of nine years, until 2029, and is intended to create a wide range of affordable medicines for local consumers. The Indian government also hopes to better position the country as the location for drug development. This PLI scheme has a budget of 1.8 billion euros.
- Medical equipment sector: This PLI scheme includes the production of equipment for radiology and other diagnostic medical imaging equipment, anaesthesia and medical equipment for the heart and respiratory system. This PLI scheme has a budget of 435 million euros.
- IT Sector: The government gives the sector a bonus on the net increase in sales of goods manufactured over a period of four years. This PLI scheme has a budget of 921 million euros.
- Automobiles and auto components: This PLI scheme aims to stimulate the production of advanced technology for the auto sector by removing potential barriers such as high investment costs. The incentive scheme also encourages new investments in the domestic supply chain. This PLI scheme has a budget of 7 billion euros.
- Telecom and network products: This scheme aims to encourage large foreign investments in Indian companies, so that they can more easily enter the global export market. This PLI scheme has a budget of 1.5 billion euros.
- Technical textiles and textile products (synthetic fibres). The PLI in this sector is mainly aimed at attracting investments to boost domestic production. This PLI scheme has a budget of 1.3 billion euros.
- Solar panel sector: This scheme helps local and foreign companies to increase their production capacity of solar panels and export them. This PLI scheme has a budget of 564 million euros.
- Steel sector: The aim of this PLI scheme is to improve the production of steel, which will increase steel exports. This PLI scheme has a budget of 793 million euros.
- Food sector: This scheme mainly focuses on creating employment and for this purpose the production of specific food products has been selected, whereby the measure can lead to an increase of 50 to 250 employees. This PLI scheme has a budget of 1.4 billion euros.
- Eligibility criteria for PLI scheme: Companies registered in India and producing goods that fall under the criteria of the scheme can apply for the PLI scheme. To qualify for the scheme, the investments must meet a certain threshold. An applicant must meet the threshold criteria of at least 100 million rupees (over 1.1 million euros) in case the company is an MSME. For larger companies, an investment threshold of 1 billion rupees (over 11 million euros) applies. To determine whether a company meets the threshold criterion, the cumulative value of the investments made up to that year compared to the base year (2019-20) is taken into account.
It is highly recommended for European companies to seek expert assistance if they want to apply for a PLI scheme in their sector. Since not every company meets the necessary criteria, it is important that the application is prepared and submitted by an expert with experience in this field and in the specific sector. The experts at IndiaConnected support companies in this and can also provide insight into other tax regulations that you can apply for.
