India's economic resilience and growth are inextricably linked to the expansion of its manufacturing sector. The nation's ambitious 'Aatmanirbhar' vision rests on bolstering manufacturing prowess, amplifying exports through the Make in India initiative, fostering innovation and investment, nurturing industrial champions via the Production Linked Incentive (PLI) Scheme, and enhancing competitiveness through SAMARTH Udyog Bharat 4.0.
This manufacturing renaissance coincides with a surge in mergers and acquisitions, a robust IPO market, and substantial private equity and venture capital investments, positioning the sector as a key driver of India's economic momentum over the next quarter-century.
Globally, companies are re-evaluating their supply chain strategies in response to geopolitical shifts and the imperative to mitigate risks associated with reliance on a single market. India emerges as an attractive alternative, leveraging its demographic dividend, cost efficiency, strategic geographic location, burgeoning infrastructure, and a commitment to streamlining business operations.
The argument for prolonging concessional tax rate
To spur domestic manufacturing, India introduced a favourable tax regime of 15 percent (plus surcharges and cess) for new domestic companies that began manufacturing by March 31, 2024. There is a compelling argument for extending this tax rate indefinitely for all new manufacturing entities:
- A 15 percent tax rate positions India competitively alongside other Southeast Asian nations, aligning with the OECD's base erosion and profit sharing (BEPS) Pillar II guidelines.
- This is not merely a tax break but a stimulus for expanding manufacturing capacity, particularly in emerging sectors, promoting import substitution, enhancing India's manufacturing appeal, and fostering capital inflow and job creation for the youthful workforce.
- It energizes the entrepreneurial landscape, encouraging the growth of startups and the MSME sector.
- The recent wave of IPOs (one out of three IPO’s in the last 12 months is from manufacturing sector) and the manufacturing sector's robust valuations in Indian capital markets reflect investor confidence in India's potential.
Sustaining renewable energy sector growth
The renewable energy sector is a paragon of innovation and sustainability, propelling the global shift to a greener, more resilient energy landscape. Recognizing power generation as 'manufacturing' for the 15 percent tax rate has catalyzed capital investment and reduced tariffs for state electricity boards.
The sector is pivotal, not just for clean energy production but as an economic cornerstone that promotes job creation, technological advancement, and energy security. The tax incentive has been instrumental in drawing investor interest and capital to this sector.
- Extending the tax benefit reassures companies of a stable fiscal environment conducive to long-term investments.
- In the highly competitive global renewable energy market, a favourable tax climate is essential to attract and retain investors.
- Prolonging the tax advantage is in line with national and international commitments to reduce carbon emissions.
- As the world recovers from various challenges, the renewable energy sector can be a catalyst for economic growth, employment, and value creation.
Given that manufacturing demands more capital than the service sector and is sensitive to commodity market fluctuations, a lower corporate tax rate on profits would further incentivize capital allocation to this segment. It is advisable to maintain the 15 percent tax rate for new manufacturing capacities without imposing an expiration date.
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