Maharashtra's VAT Roadblock
Published on Wed, Jun 06,2012 | 22:05, Updated at Wed, Jun 06 at 22:08Source : Moneycontrol.com
By: Nitin Vijaivergia, Associate Director –Indirect tax, PwC India
The issue of VAT refunds for auto companies which have Mega Units in Maharashtra has again come to the fore, due to an auto major’s announcement that its proposed investment in Maharashtra is presently on hold. The controversy stems from the amendment made to the Maharashtra VAT Rules, 2005 (Rules) in 2011, by which Rule 52A was introduced.
Typically, auto companies in India have a two company structure – a manufacturing entity and a distribution entity. The manufacturing entity sells all the cars manufactured by it to the distribution entity, which in turn sells cars to Dealers in the same State or in different States.
The distribution entity may even stock transfer cars to other locations. When the manufacturing and distribution entities are both located in the same State, the distribution entity can claim Input Tax Credit (ITC) of the VAT paid by the manufacturing entity on sale of cars to it, and set it off against VAT payable on sale of cars to Dealers. ITC which is not set-off can then be claimed as a refund by the distribution entity.
In Maharashtra where VAT on cars is 12.5%, the distribution entity was eligible for a refund of 10.5% on cars sold to Dealers outside the State, as CST payable by the Dealer is only 2%. It is this position which has undergone a change since March 2011.
Rule 52A, which specifically applies to Mega Units in Maharashtra, restricts the ITC available on purchases of goods made from such Units, when the goods are re-sold on an inter-state basis. The implication of this amendment is that in respect of cars sold by the distribution entity outside Maharashtra, ITC available is restricted to 2%, while the manufacturing entity would have charged the distribution entity 12.5% VAT. So in effect, the distribution entity loses a refund equivalent to 10.5% of the VAT paid by the manufacturing entity on cars which are sold to Dealers outside Maharashtra, and this amount becomes a cost for car manufacturers in Maharashtra.
Manufacturing entities which have been set up as Mega Units are entitled to various Industrial Promotion Subsidies as well as refund or deferment of local taxes under the Maharashtra Industrial Policy. If such a manufacturing entity sells cars to Dealers outside the State, its entitlement to subsidies decreases. Therefore, the amendment is a double edged sword for car manufacturers which have Mega Units, and the hit is substantial enough to make them reconsider their investment plans in Maharashtra.
In spite of representations made by the auto industry, the Maharashtra Government has been unrelenting thus far. It remains to be seen whether the Maharashtra Government will provide alternate incentives to industries, and if this would encourage industries to carry on with investments in Maharashtra.
With inputs from Ruchira Kulkarni, Assistant Manager - Indirect Tax, PwC India