US-China trade war can benefit Indian companies
Prospects for firms to increase their share of US market are favourable at this point in time
Q: My family has been traditionally involved in the manufacturing of jewellery; the firm has now ventured into exports. I am unsure whether there are good prospects, though I am told that the US is a big market for jewellery exports. Would you be having any factual data on this issue?
A: India's annual gems and jewellery export to the United States is currently around $10 billion. As a result of the trade war between the US and China, the prospects for Indian companies to increase their share of the US market are favourable. Thailand and Vietnam are aggressively tapping the US market. Some Chinese jewellery makers are shifting base to India because it is expected that Indian exports can increase by an additional $1 billion and cross the $11 billion mark. Foreign firms are keen to set up manufacturing base in special economic zones in India from where exports would give them exemption from taxes.
The Gems and Jewellery Export Promotion Council recently organised an event in India to showcase Indian skills in jewellery making. This was attended by 23 leading jewellery importers from the US. One of the American jewellery firms that attended the event indicated that it was impressed by the cost effectiveness of the products manufactured in India. Design and technology pertaining to diamond jewellery studded with gem stones have been found to be attractive for the US market. However, rising gold prices have dented jewellery demand globally and, therefore, may be a threat in future for higher jewellery exports.
Q: A foreign company with which I am associated wants to set up a company for manufacturing chemicals in India. I am told that there is a recent law reducing the rate of tax on companies that are involved in manufacturing products. As my company will be mainly involved in the processing of raw materials, I want to know whether it will be treated as a manufacturing company. If so, what would be the benefit under the new law?
A: If the foreign firm incorporated a company in India on or after October 1, 2019, the profits of such a company will be taxable at a flat rate of 15 per cent. In addition, a surcharge of 10 per cent on such tax will be payable, as well as an education cess of 4 per cent. Therefore, the total tax liability will be 15 per cent plus 1.5 per cent surcharge plus 0.66 per cent education cess, aggregating to 17.16 per cent. This rate is comparable to rates applicable to companies set up in other countries which attract foreign direct investment. Of course, the tax liability will arise only from the financial year in which you have a taxable profit after setting off the commercial business losses and normal depreciation charged during the initial years of the business from the date of its commencement.
A manufacturing company is defined by the Supreme Court of India to mean a company which undertakes any activity as a result of which there is a change in the composition of the raw material resulting in a different product. According to court decisions, 'manufacture' means bringing into existence a new and distinct object or article or thing with a different chemical composition. Hence, processing of raw materials that brings into existence a new product would amount to manufacture. If the new company set up in India is involved in processing of raw materials, it would be eligible for the lower rate of tax of 17.16 per cent. The manufacturing activity should commence by March 31, 2023.
Q: When demonetisation was done in November 2016, the government wanted to push digitisation and move towards a cashless economy. However, this is not happening as the cash economy in India is increasing and shopkeepers are refusing to accept digital payments. Are any measures being taken to reverse this trend?
A: A committee under the chairmanship of Nandan Nilekani was constituted by the government to suggest measures which would kick-start the digital payments ecosystem. This committee has suggested the setting up of a fund for financing digital infrastructure which would embrace shops and retailers, even in cities and small towns throughout the country. At present, there are 4.2 million point-of-sale machines. With the setting up of this fund, penetration of digital infrastructure will spread to all the three-tier and four-tier cities.
The objective of the fund is to ensure that small and medium enterprises, healthcare centres, all utilities, public distribution system and grocery/provision stores in towns and rural areas are digitally-connected. All banks have been told to identify one district in each State for promoting hundred per cent digitisation. This pilot project will ensure that every commercial unit in the district is fully enabled to make or receive digital payments.
The writer is a practicing lawyer, specialising in tax and exchange management laws of India.
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