[Opinion] Sector-Specific Incentives and Disincentives | Cost & Operations Impact

CMA Arjya Priya Sinha [2026] 183 taxmann.com 310 (Article)

Designing incentives and disincentives is one of the most powerful ways in which the State shapes the cost structure, risk profile and strategic choices of businesses. Well-crafted incentives can accelerate investment, innovation and employment, while poorly designed ones can distort behaviour, fragment firms, and burden public finances. For cost and management accountants, understanding these sector‑specific levers is essential for realistic costing, pricing, and long‑term planning.

This article analyses key categories of incentives and disincentives across selected sectors—manufacturing, services (including IT/ITeS), infrastructure and green/ESG-linked activities—and examines their impact on business operations and cost management. The focus is not on listing schemes exhaustively, but on drawing out patterns that matter for managerial decision‑making.

1. Conceptual Frame – Incentives, Disincentives and Cost Behaviour

Government interventions influence business economics through two broad channels:

• Incentives – tax holidays, accelerated depreciation, investment‑linked deductions, capital or interest subsidies, reduced customs duties, rebates in indirect taxes (e.g. SGST reimbursement), lower utility tariffs, concessional land, and soft regulations.
• Disincentives – higher tax rates, minimum alternate tax (MAT) expansion, environmental or sin levies, compliance thresholds, removal of exemptions, and tightening of definitions (for example, narrowing the scope of “charitable purpose” or widening tax bases).

From a cost‑management lens, these instruments alter:

• Fixed cost commitments (e.g. capex net of subsidy, long‑term power tariffs).
• Variable cost per unit (e.g. energy duty exemptions, customs duty on raw materials).
• Risk‑adjusted cost of capital (e.g. viability gap funding, tax stability).
• Effective tax rate over the project life, via tax holidays, deductions and MAT interactions.

A key insight from empirical work on size‑dependent incentives is that thresholds (based on turnover, headcount or investment) can create “cliffs” in the cost structure, motivating firms to remain small or to fragment operations to stay below the limit, rather than grow organically. This has deep implications for productivity and competitiveness.

2. Manufacturing – Incentives, Structural Choices and Cost Competitiveness

2.1 Nature of Incentives in Manufacturing

The manufacturing sector typically receives a dense mix of central and state‑level incentives, especially under the broad “Make in India” and industrial promotion agenda. Common mechanisms include:[4][6][3]

• Activity‑based tax incentives:

1. 1. Enhanced deductions for in‑house R&D expenditure (e.g. weighted deduction in certain periods),
   2. Exemptions or reductions in customs duty for importing capital goods and inputs used for export‑oriented or high‑tech production purposes.

• Investment‑based incentives:

1. 1. Capital subsidies of 20–25 percent of project cost for eligible projects,
   2. Higher subsidy percentages in backward regions or for specific thrust sectors such as electronics, chemicals, textiles or renewable components.

• State‑level incentives:

1. 1. Refund or reimbursement of net SGST output for a defined period,
   2. Stamp duty and registration fee concessions on land and loan documents,
   3. Electricity duty exemptions or per‑unit rebates for small and medium plants,
   4. Tailor‑made packages for mega projects.

These incentives directly affect the cost of setting up and scaling manufacturing facilities, often front‑loading benefits in the early years of a project’s life.

2.2 Operational and Cost Management Impact

For manufacturing businesses, incentives translate into specific cost and strategic consequences:

• Lower Effective Project Cost and Payback Period – Capital subsidies and tax holidays reduce the initial cash outlay and increase early post‑tax cash flows, which can materially improve project IRR and shorten payback.
• Location Decisions and Cluster Formation – Differential state incentives, especially SGST refunds, power tariff subsidies and land‑related concessions, lead firms to compare states not only on infrastructure and logistics, but also on multi‑year incentive value. This directly influences landed cost of production and distribution strategies.
• Cost Accounting Complexity – When multiple incentive streams exist—capital subsidy, interest subsidy, tax refunds—there is a need for robust treatment in cost accounts (e.g. allocation of subsidies to cost centres, impact on depreciation base, disclosure of government assistance). This complicates benchmarking across plants with and without incentives.

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