The Production Linked Incentive (PLI) scheme, launched in 2020, has become a cornerstone of India’s ‘Make in India’ and ‘Atmanirbhar Bharat’ initiatives. Aimed at boosting manufacturing and attracting investments across 14 sectors, the scheme aligns with India’s ambition to make its manufacturing sector globally competitive. Simultaneously, the Goods and Services Tax (GST) system, introduced in 2017, strives to unify taxation and reduce compliance burdens. Together, these frameworks hold immense potential to create a robust industrial ecosystem..
1. Addressing Blocked Input Tax Credits (ITC) for Manufacturers
Under Section 17(5) of the Central Goods and Services Act, 2017 (CGST Act), manufacturers face challenges in availing ITC for construction-related expenses. Although the Supreme Court recently allowed ITC claims for buildings considered “plants,” the financial strain on manufacturers remains significant. Since the PLI scheme excludes expenses on land and construction for calculating investment thresholds, the government should synchronize GST filings with PLI applications to streamline incentives.
2. Harmonizing Valuation Standards
PLI beneficiaries must periodically submit incremental sales claims to Project Monitoring Agencies (PMAs) based on statutory audits. Simultaneously, GST valuation disputes can arise, leading to dual compliance challenges. Central Board of Indirect Taxes and Customs (CBIC) should issue clear guidelines to prevent overlapping disputes between GST officers and PMAs, fostering a business-friendly environment.
3. Non-Creditable Taxes on Essential Inputs
Certain critical inputs, such as petroleum products and state-specific levies, remain outside GST’s ambit, inflating operational costs. Incorporating these non-creditable taxes into PLI claim calculations can help manufacturers maintain competitive pricing. For instance, a mechanism to reflect VAT-paid fuel expenses on the GST portal could bridge this gap efficiently.
4. Rationalizing GST Rates for Plant and Machinery
High GST rates (18%) on essential manufacturing equipment add to upfront costs, despite ITC availability. Introducing reduced GST rates (e.g., 5% or 12%) for PLI-eligible machinery would alleviate financial burdens and align with the government’s vision of fostering a manufacturing-driven economy.
5. Integrating GST Registration with PLI Applications
Manufacturers often navigate multiple regulatory portals for approvals. Enhancing the GST portal to function as a single window for PLI applications could simplify processes. Existing data, such as turnover details in GSTR 9C, can streamline PLI eligibility checks, reducing compliance bottlenecks.
6. Exempting GST on Government Approvals
Manufacturers often pay GST on statutory approvals under the reverse charge mechanism (RCM). Exempting GST on such approvals for PLI-eligible manufacturers would improve cash flow and reduce financial stress. Provisions for conditional exemptions—revoked only upon application rejection—could further enhance ease of doing business.
7. Addressing Import Services from Foreign Affiliates
PLI beneficiaries often rely on parent companies for technical know-how or brand licensing. Despite CBIC’s clarifications, disputes over GST liabilities on imported services persist. Ensuring uniform application of CBIC Circular No. 210/4/2024-GST will mitigate compliance risks for manufacturers.
8. Streamlining Refund Mechanisms for Exporters
Delayed refunds under Rules 89 and 96 of CGST Rules hinder manufacturers aiming for global competitiveness. Simplifying refund procedures and aligning them with PLI schemes’ timelines can reduce financial strain and bolster export-oriented growth.
Conclusion
To unlock the full potential of the PLI scheme, a seamless integration with GST compliance is essential. From addressing ITC challenges to streamlining refund processes, the government must adopt a holistic approach. Aligning tax policies with industrial goals will not only boost domestic manufacturing but also position India as a global manufacturing hub. Such reforms will encourage investments, reduce costs, and drive sustained economic growth.