It was a tax break promised by the Centre to boost the country's manufacturing skills base that India Inc waited for nearly three years only to find out now that they are not eligible for it.

Under the National Manufacturing Policy of 2011, the government had assured industry of a weighted tax deduction of 150% for investments in training people to run factories. The policy enunciated the government's target to create 100 million jobs in the sector and raise the share of manufacturing in India's gross domestic output to 25% from 15%, around which level it has hovered for over two decades.
Government's U-turn on tax break on training lets down companies

But the tax break, notified by the finance ministry a fortnight ago, doesn't recognise most corporate training initiatives, including re-skilling, in-house training or most public-private partnerships (PPPs) in skill development. Even the National Skills Development Corporation (NSDC), set up by the finance ministry on a PPP basis, or its hundreds of partners, are not eligible for the tax break.

Ironically, the tax break was notified after Finance Minister P Chidambaram was reminded about the skill development elements of the manufacturing policy at a meeting of the NSDC board in late June. But NSDC and its various partners have been left out of the ambit of the tax break, though the policy explicitly said otherwise.

"To encourage private sector to effectively participate in the skill development initiative, the government will provide a weighted standard deduction of 150% of the expenditure (other than land and building) incurred on PPP projects for skill development in manufacturing sector in separate facilities in co-ordination with NSDC," the National Manufacturing Policy states.

But there seems to have been a significant loss during the policy's translation into a section of the Income Tax law, which has incidentally extended the tax break to the services sector as well. The Finance Act of 2012 had inserted a new Section 35 CCD into the Income Tax Act, but the guidelines for approving skill development projects for the tax break were issued on July 15 this year.

The guidelines require companies to create separate facilities for their skill development projects in training institutes run by or approved by the government. Moreover, only those training initiatives will be eligible that focus on potential or newly recruited employees. Any skilling programme that commences six months after an employee is recruited wouldn't be considered. "This can significantly hamper effective skilling in the manufacturing sector, as firms will not be able to re-skill or up-skill their existing workforce every time they upgrade their production technologies and processes," said an NSDC spokesperson.

Spurring manufacturing growth and skill development was high on the agenda of Prime Minister Manmohan Singh's meeting with industry captains earlier this week. But industry is fuming about the Centre's approach to private sector skilling initiatives, reading the botched up tax-break as a signal that industry should keep out of skill development.