Fiscal Incentives to Further Augment “Atmanirbhar Bharat Abhiyaan”

The Finance Minister of India recently presented the Union Budget (Budget) for the Financial Year 2024-2025 (FY 24-25) before the Parliament on 23-7-2024. She also tabled the Finance (No. 2) Bill, 2024 (Finance Bill) proposing various amendments, inter alia, in the Customs Act, 1962 and the Customs Tariff Act, 1975 (Tariff Act). In her Budget speech, the Finance Minister affirmed the Government’s commitment towards the Atmanirbhar Bharat Abhiyaan by, inter alia, proposing certain amendments to the First Schedule of the Tariff Act vide Clause 107(b) of the Finance Bill and the Fourth Schedule thereunder, stating

“My proposals for customs duties intend to support domestic manufacturing, deepen local value addition, promote export competitiveness, and simplify taxation, while keeping the interest of the general public and consumers surmount.”

Atmanirbhar Bharat Abhiyaan: The journey continues

Introduced in 2020, the “Atmanirbhar Bharat Abhiyaan” aims to make India and its citizens independent and self-reliant in all senses. The five pillars outlined by the Government in this regard are economy, infrastructure, system, vibrant demography and demand.¹ In consonance with the above objective, the Union Budgets presented in the previous financial years also sought to promote increased domestic manufacturing capacity for greater local value addition. For instance:

(a) FY 2021-2022: The customs duty exemptions on parts of chargers and sub-parts of mobiles were withdrawn² and the effective rate on few parts of mobiles were increased.³ In terms of renewable energy, a phased manufacturing plan for solar cells and solar panels was notified and duties on solar products were increased.⁴

(b) FY 2022-2023: The Phased Manufacturing Program (PMP) was introduced for wrist wearable devices,⁵ hearable devices⁶ and smart meters⁷ w.e.f. from 1-4-2022.

(c) FY 2023-2024: To further deepen domestic value addition, certain relief was provided in the duties levied on specific imported parts and inputs of mobile phones, and also on capital goods and machinery required to manufacture lithium-ion cells for electric vehicles (EV) batteries.

Vide the Budget, the Government has continued its stride towards attaining self-reliance by, inter alia, introducing new tariff lines in relation to sustainable blended aviation fuel, products used in Indian semiconductor machines, e-bicycles, etc.⁸ aiding in better identification of imported goods.

In this article, an attempt has been made to analyse the background behind introduction of the tariff lines proposed to be inserted in the First Schedule to the Tariff Act vis-à-vis the solar energy, aviation and EV sectors.

1. Solar energy sector

(a) Previously, the Union Budget for the FY 2022-2023 had also increased customs duties on import of photovoltaic cells with the intent to promote domestic manufacturing.⁹

(b) The Ministry of New and Renewable Energy has consistently advocated for reduction of dependency on import of components for photovoltaic (PV) modules and launched Production Linked Incentive (PLI) Schemes¹⁰ to promote the domestic solar sector. The Ministry had clarified in 2019¹¹ that solar cells shall be considered as domestically manufactured only if they have been manufactured in India using undiffused silicon wafer classifiable under Customs Tariff Head (CTH) 3818¹² with all the necessary processes required and that the use of imported diffused silicon wafers in manufacture shall not qualify.

(c) In the above backdrop, the tariff item Customs Tariff Item (CTI/CTH) 3818 00 10 for “undiffused silicon wafers” is proposed to be substituted, which will attract “free” rate of import duty. Since this product is crucial for manufacture of solar cells and PV modules it can be inferred that the Government is firm in its eagerness to boost local manufacture of solar products and build a strong renewable energy base. The Finance Bill has also expanded the list of exempted capital goods for use in the manufacture of solar cells and panels in India.¹³

2. Aviation sector

(a) The Government had provided customs duties exemption to parts, tools, testing equipment, etc. imported for maintenance, repair and overhauling (MRO) of aircrafts or i components and parts in 2017.¹⁴ Exemption from import duty was also provided to raw materials and parts imported for manufacture of aircrafts and theirparts in 2021¹⁵ to boost the local aviation sector.

(b) The Government has extended the above customs duties exemptions till 31-3-2026 vide the Budget for the FY 24-25. The time period for re-export of aircrafts imported for MRO activities has been extended from 6 months to 1 year, further extendable by 1 year.¹⁶

(c) The Indian Government has also set indicative targets to achieve 1% blending of sustainable aviation fuel (SAF) in aviation turbine fuel used in domestic and international aircrafts from 2027¹⁷, in furtherance of its commitment to the International Civil Aviation Organisation which aspires to reduce carbon emissions from aviation by 2050. SAF, which is defined¹⁸ as a renewable aviation fuel that meets the sustainability criteria, is also covered under the global Carbon Offsetting and Reduction Scheme for International Aviation (Corsia)¹⁹.

(d) For ease in specific identification of imports, the tariff item CTI 2710²⁰ 19 33 for “blended aviation turbine fuel” is proposed to be introduced, which will attract a levy of 5% import duty. A supplementary note, sub-note (l)²¹ is also proposed to be inserted in Chapter 27 to define blended aviation fuel.

(e) Pertinently, the Minister for Petroleum and Natural Gas has also reiterated the role of domestic SAF production and indigenous solutions required to fulfil the vision of “Atmanirbhar Bharat Abhiyaan”.²² Potential refineries for production of SAF have also been/are identified by the Government to provide manufacturing incentives.

3. EV sector

(a) The Government has been legislating policy in the EV sector with a view to reduce dependence on imported petroleum products²³, especially considering tremendous demand foreseen locally²⁴ for inter alia EV two-wheelers.

(b) Since 2019, PLI Schemes and PMPs²⁵ have been notified to promote local manufacturing of EV components and sub-systems lending support to the “vocal for local” initiative.²⁶ Such manufacturing schemes also receive an impetus from the concessional rate of duty prescribed for import of EVs in a knocked down condition,²⁷ which can be assembled locally. Recently, the Government has also extended the Electric Mobility Promotion Scheme, 2024 (EMPS, 2024) up to 30-9-2024²⁸ to foster the growth of the EV manufacturing ecosystem in India.

(c) A new tariff item CTI 8711²⁹ 60 90 for “e-bicycle of battery-operated pedal assisted vehicle”, attracting a levy of 100% customs duty is proposed to be introduced for easy identification. Considering the Government’s steady stance that imports of EVs are to be discouraged, the steep levy on import of EV two-wheelers in complete assembled unit can further assist in achieving self-reliance and green mobility.

The above amendments to the First Schedule to the Tariff Act proposed in the Finance Bill can certainly be discerned to have a positive impact towards realisation of the “Atmanirbhar Bharat Abhiyaan” vision of the Government and consequently attract investments.