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Budget 2014: Fillip To Manufacturing Sector?

Published on Mon, Jul 07,2014 | 22:03, Updated at Mon, Jul 07 at 22:03Source : 

By: Vivek Mishra, ED & Director- Indirect Tax, PwC India

The industrial production data has been inconsistent in the past few quarters and at times, been in negative territory. The newly elected Government at the center has shown some intent to boost the economy but these are still early days to derive a meaningful assessment. Perhaps this Budget presents the perfect opportunity to come up with progressive tax policies to rebuild the faith and bring about a sense of optimism among players in industry.

Recently, the Government has extended the period of excise duty concession that was granted to capital goods, consumer durable goods and automotive industry up to 31 December, 2014. The relief has come just ahead of the Budget 2014, perhaps for the reason that the earlier notifications granting concession were due to expire on 30 June, 2014. However, by extending it by six months the Government seems to have indicated their positive intent.

Keeping in with the worsening trend of Budgetary deficit, an across the board indirect tax rate reductions seem highly unlikely, but one can expect sector specific concessions. There are a limited number of pressing issues that require amendment to the law. The major thrust area would be on simplification of procedures, removing unnecessary compliances and to develop the framework for sound tax administration.

Typically, under central excise considerable emphasis continues to be placed on physical controls over the manufacturing process, movement and storage of excisable goods. The excise officers while processing registrations and warehousing permissions, still rely upon physical controls such as the layout of factory, the entry and exit doors and similar physical concepts. The concept of centralised registration is still not available to all taxpayers under central excise. Two factories of one company, separated merely by a road or by one vacant plant would still require separate registrations.

In today’s information-rich environment, large scale evasion of excise duty is close to impossible in the organised sector. Today’s economy has refined IT systems which have a large number of tools to generate audit trails.

In contrast to central excise, the service tax authorities have been relying exclusively on financial records, since the nature of services precludes physical controls over the provisioning of services to clients. If the service tax authorities are able to rely on financial records to ensure or check on compliance with service tax obligations, why can’t the excise authorities do the same?

This Budget would also end the controversy over the basic principal of valuation under central excise which has emerged post the judgement by the Supreme Court in Fiat India (P) Ltd (AIT-2012-354-SC); wherein a well settled and generally followed principle of valuation based on transaction value had been rejected to include notional value to levy tax.

The Supreme Court in the above judgement laid down that where the manufacturer has been selling the goods at a price lower than the cost of production for a number of years, the sale price cannot be considered as ‘normal price’, accordingly, the extra consideration has to be valued and taxed. Post Fiat judgement, a series of show cause notices has been raised by the department, wherein the ‘transaction value’ adopted by the manufacturer has been challenged and notional costs/gains are considered to enhance the taxable value. This has created uncertainty on the amount of tax that should be paid as excise duty by the manufacturer.

Similarly, the provision governing distribution of CENVAT credit by input service distributor was amended in the Budget 2012 to restrict preferential allotment of common credit by corporate office to its taxpaying units. This has resulted in imbalance in distribution of available CENVAT credit vis-a-vis the output tax liability. This has worsened the situation for manufacturing sector which has already been overburdened with inflated cost of capital funding. Since the transaction is revenue neutral the eligible credit after adjusting for exempt/non-taxable turnover, should be allowed to be distributed without any restriction.

(Tajinder Singh also contributed to this article)


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