India is an emerging economy. In the past few years, India has witnessed the foreign start-up culture which is still gaining momentum. At present, there are over 39,000 start-ups in India, which also includes foreign start-ups. Of which, 1300 start-ups are added this year so far. As per the recent report from NASSCOM, India is the third-largest start-up ecosystem in the world after the US and UK.
Additionally, India is also a great destination for foreign investment. This is owing to its large consumer market, world-class infrastructure, skilled workforce, low manufacturing costs, and abundant natural resources.
Need for state subsidies in India
Today more and more entrepreneurs are choosing to start their own business in India. Recognizing the importance of start-up growth, the government offers numerous subsidies to start-ups in India. The government offers a variety of start-up schemes and loans to encourage the growth of start-ups. These subsidies aim to bolster the welfare of society. Moreover, it helps start-ups to attract foreign investments and boost the economy.
The economy has observed a positive trend in FDI since the launch of the ‘Make in India’ campaign, which attracts foreign investors to invest in manufacturing sectors in India. The government has opened up avenues in 25 sectors including automobile, aviation, defence manufacturing, oil and gas, railways, electronic systems, pharmaceuticals, roads, and highways, among others. Due to the foreign investment-friendly environment created by the ‘Make in India’ campaign’, India has been able to cross the $ 60 billion mark in the financial year 2017-18. Owing to the ‘Make in India’ campaign’, the FDI received in India in from April 2014 to March 2019 is $ 286 billion making up for 46.94% of the overall FDI received since April 2000.
Another major reason for providing subsidies is to reduce the gap between available financial assistance and the challenges to avail it. As per reports, less than 5 percent of small and medium enterprises have access to formal credit. Remaining 95 percent, depending on the informal sources of finance to run their business. In spite of many private equities and debt funding options, start-ups struggle to get early-stage funding. This is where state subsidies play a crucial role.
Government’s efforts for providing state subsidies in India
The Indian government offers subsidies to various industries and products such as petrol, fertilizers, food, etc. The subsidies are given in various forms which include:
- Direct subsidies such as interest-free loans, cash grants, etc.
- Indirect subsidies such as low-interest loans, depreciation write-offs, income tax exemption, premium-free insurance, rent rebates, etc.
The state subsidies vary from one state to the other. Apart from the region, subsidies also depend on the industry sector, size, products, investment potential, etc. Like for example, the states in north-eastern India have numerous tax incentives for manufacturers.
Likewise, incentives can be linked to the land on which manufacturing in India takes place. These can be in the form of waiver or reduction of stamp duty charges, registration fee, property taxes and so on.
Although every state has its own policy, some of the common state subsidies include:
- Every state develops an industrial policy, generally spanning over five years. However, this period may vary from one state to another.
- The industrial policy applies to all manufacturing units. In addition, there are sector-specific policies too.
- Some states classify special zones which further attract more benefits.
- State subsidies are available to new as well as existing units that undergo expansion.
- The benefits available to a foreign company are the same as that available to an Indian company.
2 effective subsidy schemes by the government of India
For foreign start-up manufacturing units set up in India, the government offers viable subsidy schemes such as:
- AIC – Atal Incubation Centres (AIC) offers grants of Rs. 10 crores to start-ups for up to 5 years. It provides financial as well as infrastructure aid to start-ups. These start-ups can belong to industry sectors such as technology, healthcare, construction, food and beverages, nanotechnology, FinTech, Internet of Things, etc.
- NSIC – National Small Industries Corporation (NSIC) scheme offers subsidies of two kinds. It provides raw material assistance as well as marketing assistance to small and medium enterprises.
Benefits of State Subsidies in India
The benefits of state subsidies in India are tremendous. They are majorly in the form of:
The benefit is in the form of a reduction in the production costs for manufacturing companies. The government has reduced the payments for a certain percentage of energy, stamp duty, water and other utility bills which these companies were required to pay earlier. This has given a competitive edge to manufacturing units.
The benefit is in the form of the capital cost of the company. Companies get to encash the benefit by availing tax reimbursements of various taxes paid to the state government.
Two primary ways of receiving tax reimbursements from the state are:
Cash Back Method
Companies charge and collect goods and services tax (GST) from the customers and pay it to the government. The tax collected is net of input tax credit. At a later stage, a certain percentage tax paid to the government is reimbursed to the companies.
Companies charge and collect goods and services tax (GST) from the customers. Companies hold back a specified percentage of net tax for a stipulated number of years as a soft loan. After the end of the period, companies pay back the amount to the government.
So, while you take a decision to invest in India, you may want to factor in these benefits. For the last 20 years, Maier+Vidorno has been addressing business needs of overseas companies in India. Our experienced team can help you avail of these benefits in the best possible manner. We also offer other support services in areas of Market Research, Distribution Management, Import-Export Management, Supply Chain & Logistics Management, Performance Management, Business Due Diligence, Recruitment, and HR Consulting. Contact us to know more.