Latest FDI reforms could hit Make in India
The latest changes to the country’s foreign direct investment or FDI policy could end up hurting the government’s ambition to make India a global manufacturing hub, as they have introduced an element of uncertainty over manufacturing investments where none existed before.
The new FDI policy announced by the government ahead of Prime Minister Narendra Modi’s visit to the United Kingdom and the G20 summit in Turkey last month, entailed liberalising norms for 15 sectors, including defence, construction, civil aviation, FM radio, single brand retail, private banks and manufacturing.
But the notification to effect these changes issued by the department of industrial policy and promotion on November 24, introduces the definition of what constitutes ‘manufacture’ within the purview of the FDI policy — which industry experts and representatives say could be a ‘double whammy’ for investments.
Defining manufacturing in the FDI policy could end up restricting foreign investments in some sectors, including the likes of electronics and hardware manufacturing. At the same time, Indian firms are worried that this could open the door for competitors to make minor changes to imported goods and still call it ‘manufacture’.
The FDI policy has defined manufacture, with its grammatical variations, as a change in a non-living physical object, resulting in transformation of the object into a new and distinct article having a different name, character and use, or bringing into existence of a new and distinct thing with a different chemical composition or integral structure.
The CEO of an information, communications, technology and electronics (ICTE) hardware company said that the definition of manufacture would lead to a lot of unnecessary litigation by the excise, service tax departments and other government agencies.
Manufacturing is defined differently in the excise, service tax and income tax laws. However, the definition in the FDI policy is based on the income tax law.
In the case of a conflict between the FDI policy and excise law definitions of manufacturing, Mr. Mathur said that the Central Excise Act of 1944 would prevail as it is a law passed by Parliament, while the FDI policy is based on an executive decision.
As per Section 2 (f) of the excise law, ‘manufacture’ includes any process, incidental and ancillary to the completion of a manufactured product.
The law separately specifies the goods that come under its ambit, with a separate schedule that lists goods, whose packing, labelling or alterations made to make it marketable to consumers also constitute manufacture.
“With the Goods and Services Tax regime coming in soon, why do we want to get into this hair-splitting over a new interpretation of manufacturing now?” asked the hardware company’s CEO, who did not wish to be identified owing to the sensitivity of the matter.
Under the new FDI policy, slitting complex films for electronic capacitors, testing, etching a surface etc. may be declared as not manufacturing, for instance, he said, stressing that the issue is being discussed among industry bodies.
These FDI reforms are ‘one more proof of minimum government and maximum governance… opening up the manufacturing sector for wholesale, retail and e-commerce so that the industries are motivated to Make In India and sell it to the customers here instead of importing from other countries,’ the commerce and industry ministry had said in a statement on November 10.
“The intent of this policy seems to be to encourage firms to Make in India and sell it in any mode they prefer, in the context of single brand retail firms that were already allowed 100 per cent FDI, but couldn’t sell online so far,” he said.
“But the definition of manufacture leaves room for problems, when taken together with the conditions imposed on Indian manufacturers with branded goods,” he added.
Indian manufacturers can now sell their own ‘branded products’ in any manner, including online, but the FDI policy places onerous conditions on them.
They must own the Indian brand and manufacture at least 70 per cent in value terms of its products in-house within India, and source a maximum of 30 per cent from other Indian manufacturers.
Further, the Indian brand must be owned and controlled by resident Indian citizens and/or companies that are owned and controlled by resident Indian citizens.
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Source:Thehindu
