Auto companies hit as Maharashtra rolls back tax sop

Chennai: Several mega projects in Maharashtra’s new automobile hub Chakan-Talegaon will see their competitive advantage disappear overnight with the state government withdrawing a sales tax exemption offered to them as part of an incentive package to woo big investments to Maharashtra. Among the companies that are likely be impacted are Volkswagen India , Mahindra & Mahindra and General Motors India . Together, these three projects pumped in more than Rs 10,000 crore in the Chakan-Talegaon belt.

The sales tax exemption was offered to these mega automobile projects to counter tax holidays and other incentives from states like Uttaranchal, Gujarat and Tamil Nadu. According to sources in the auto industry, the government offered these mega projects the opportunity to claim double VAT set-off benefits. While companies could claim MODVAT on components, they were also allowed to claim VAT set-off on their entire production, including sales outside Maharashtra. This was done to match the value of incentive packages offered by rival states.

As part of the arrangement, these companies were allowed to set up two separate subsidiaries-a manufacturing arm and a marketing and sales arm. The manufacturing company would sell the entire production to the marketing and sales arm to claim VAT set-off for sales within Maharashtra. The marketing arm would then bill it to dealers across the country. Under the new rules, the government says companies will not be able to claim VAT set-off for products manufactured in these mega projects for vehicles sold outside the state. In other words, the companies will only get VAT set-off now when the vehicle is sold within the state-the earlier arrangement of selling through a marketing company will not be entertained.

Understandably the industry is extremely concerned about this new development. For one, it opens a Pandora’s box of state governments going back on their promises once the factory is up and running. For another, the incentives comprised a significant part of the project cost structure which will now need to be completely redone. “The incentive offered was substantial,” says a senior official with one of the affected companies. “Currently, about 15-16% of our vehicle sales take place in Maharashtra, which means we will get no VAT set-off for 85% of our production under the new rules. The VAT set-off covers 75% of the total vehicle price,” he said.

The automobile industry is upset that the government has “changed the rules after the game started”, said another top official with one of the affected companies.

“The special benefit for the mega project was that the entire lot of vehicles could be sold in Maharashtra through the two-company model,” he added. While the affected parties are looking to “engage with the government to explain their point of view”, there is also the possibility that future incremental investments may not go to Maharashtra unless the incentives are guaranteed. Already GM had announced a couple of months ago that it would invest another $500 million in India. Others like M&M have just invested in its Zaheerabad facility while Volkswagen may also consider expanding capacity to tap India’s top gear growth in car sales.

When contacted, M&M refused to comment. The GM India spokesman said: “We have no idea about this.” The Volkswagen Group India head of communications, Alexander Skibbe, in an email reply, said: “We decided on Maharashtra as the location for our plant and headquarters for the Volkswagen Group India for several reasons. Both sides agreed on commitments-we to develop industrial infrastructure and to create jobs for the region, the government to support our investments with tax incentive in the starting period. On this basis, we calculated our business plan and decided on Maharashtra. As we have achieved our commitment, we have no reason to believe that our partners from the government will not fulfil their promise.”

The current structure is that companies pay 12.5% VAT on the final vehicle but subtract the VAT paid on the components. The same thing happens when the vehicle is sold outside the state with minor differences thanks to the dual-company model. Also, if the vehicles are sold directly from Maharashtra to, say, a dealer in MP, companies will need to pay an additional 2% CST on them.
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