Union Budget 2024-25: Extension of concessional tax regime for India’s manufacturing sector

As we approach towards full Union Budget announcement for FY 2024-25, investors are optimistic about the government’s commitment to boost the manufacturing sector by extending the sunset date for the concessional taxation regime of 15%, for new manufacturing companies. This rate was made effective from FY 2019-20 and was available to domestic manufacturing companies set up after October 1, 2019, and which commenced production on or before March 31, 2024.

India’s economic growth

India’s GDP growth rate of 8.4% in third quarter of the fiscal year 2024, surpassed all expectations, as market analysts had expected slower growth in this quarter, between 6.6% and 7.2%. The propelled growth has been the result of emerging consumer trends and overall rise in private consumer expenditure. From the production side, robust growth came from manufacturing sector, contributing to about 11.6%.

The above concessional regime has significantly contributed to growth and development of India’s manufacturing sector by making it a more attractive investment option for domestic as well as for foreign investors, boosting production by establishing incentivized manufacturing units and creating more employment opportunities that have pushed up overall socioeconomic development of the nation.

It is also aligned with the national initiative of “Make in India”/ promoting the idea of “Atamnirbhar Bharat” (Self-Reliant India) and will be a strategic support of the government’s vision of achieving a “Viksit Bharat” by 2047.

Future outlook

The global economy is on the path to recover in 2025, owing to upward corrections in United States and several large developing economies. India has the opportunity to become a preferred manufacturing destination. Extending the concessional tax rate period will allow Indian manufacturers to position themselves better to capture a larger share of the global market, especially in high-demand sectors such as electronics, pharmaceuticals, and automotive. Indian manufactured goods can be offered globally at competitive prices resulting in an enhanced market share globally. This will not only improve productivity and efficiency, but also make Indian manufacturing more innovative and competitive on a global scale.

India’s economy is forecast to expand by 6.9% in 2024 and 6.6% in 2025, mainly due to public investment and private consumption. The UN World Economic Situation and Prospects (WESP) 2024 report, launched in January 2024, had projected growth in India to reach 6.2% in 2024, amid robust domestic demand and strong growth in the manufacturing and services sectors.Keeping in mind domestic as well as overseas demand, the Indian manufacturing sector can be an attractive destination for foreign direct investment, which will ultimately facilitate job generation, increase exports, reduce import dependency and expand market share, thus strengthening overall economic growth. Investors, particularly those in manufacturing, require long term planning due to significant capital expenditures. India has already started its journey of being a manufacturing hub; however, it will still need more time and capital to traverse this path. Therefore, extension of concessional tax regime will create favorable environment for long term strategic planning and growth of the economy. In short, accelerated growth in the manufacturing sector will continue to contribute to India’s economic development, aligning with the vision of a self-reliant and globally competitive India, and help in achieving the target of 7% growth in coming years.(Rohinton Sidhwa is Partner, Deloitte India)