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Budget Proposal
Ever since the announcement of National Capital Goods Policy,
2016, Government has taken a slew of measures to increase &
encourage local production of capital goods. Industry keenly
awaited Government to take further steps, in Budget 2022-23, to
protect/ enhance a potential market share for indigenous players,
who have done substantial investments in this area.
Budget 2022 aims at further bolstering these objectives by a
two-fold action plan (a) imposition of additional import tariffs;
and (b) more preferential treatment to indigenous players in
Government procurements. The proposals announced by Union Budget
2022-23 are certainly a step in the right direction.
Government’s theme on the custom tariff front has been to
phase out various exemptions and increase tariff on capital goods.
Illustratively, exemption on various machinery for garment sector
is proposed to be withdrawn effective April 1, 2023. Prominently,
new projects registered after September 30, 2022 under the popular
Project Import scheme will attract Basic Custom Duty of 7.5% vs.
hitherto these rates ranged from 0-5%. The benefit to all existing
projects, at old rates, will be grandfathered till September 30,
2023.
Government has also announced a gradual phasing out of import
duty exemptions on capital goods specifically linked to sectors
such as power, fertilizer, textiles, leather, footwear, food
processing and fertilizers amongst others.
On spending front, Government has committed to increase capital
procurement budget in defence to 68% from 58%, for domestic
industry in 2022-23. Further, outlay for capital expenditure is
being stepped up by 35.4% to 7.50 lakh crore in 2022-23. Needless
to add that, the capital goods industry would be a major
beneficiary of said proposals & commitments.
Impact
Local manufacturers shall get a level-playing field to supply
capital goods for various infrastructure projects in identified
sectors.
Changes in custom tariff emboldens Government’s commitment
to promote ‘AtmaNirbhar Bharat’ and the Government’s
flagship ‘Make-In-India’ scheme. Further, phased removal of
exemptions is certainly laudable, giving certainty from supply
chain planning perspective.
A surge in registration of projects for Project Import scheme is
imminent.
ELP’s Insights
The suggested tariff changes could prove to be
counter-productive for investments in the short run, with several
proposals at the evaluation stage will now have to re-draw their
strategy and feasibility analysis. History evidences that tariff
changes for industries, where indigenous players do not immediately
match up to requirements being earlier met through global supply
chain could portray certain operational challenges.
Already talks of representation to defer the proposal by a year
so as to allow more preparation time for investors and industry is
doing rounds in media circles.
The investments plans should carefully analyze the timing of
capex implementation thereunder and align position vis-à-vis
the present changes.
It remains to be seen whether the Export Promotion Capital Goods
Scheme under the Foreign Trade Policy would also be revamped or
discontinued, when the 2022 policy is announced, in light of
developments on the import tariff position above.
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