Indian car makers in deep waters as tax department begins probe

Friday 19 April 2013, 10:13 AM by

In an attempt to increase the government revenue, tax officials have opened up the long awaiting tax investigation against car makers. According to sources, Indian sub-divisions of automobile manufacturers like Ford Motor Company, General Motors and Honda Motor Company have received notices, recently. They were asked to clarify whether they sold some models at a lower cost to pay less factory tax. According to an executive from one of the aforementioned companies, the firm is abiding by the directions of the tax department. On the other hand, Ford India is in talks with relevant authorities to sort out the issue.

This recent initiative by the government of India is an attempt increase the revenue in order to fill the gap in financial budget. Central Government has committed to bring down the budget deficit of the country to 3 per cent of the Gross Domestic Product (GDP), latest by 2017. However, the target does not seem feasible as the economy is witnessing a slowdown, thus, affecting the net revenue generation. According to a tax official, the decision to revive the probe was made following victory in a case involving Fiat India in the Supreme Court of India.

Fiat India was asked to pay more tax after the revelation by the tax department that the company was selling its models at a wholesale price that was actually lower than their cost of production. The Italian car maker protested against the order in the Supreme Court and lost the case against the tax department. This resulted in a hike of 4.3 billion INR in the tax liability of Fiat India for the period 996-2001. Tax department put forth the argument that the discounted price should not be considered for tax calculation but the production cost. According to the tax official, “If they can bear losses by selling at below cost, they should pay the full tax as well.”

Sugato Sen, Deputy Director-General, Society of Indian Automobile Manufacturers (SIAM), quoted, "This is arbitrary, because a company calculates overall costs and not as per every single model, as they would have several variables such as different marketing and publicity costs, factory overheads, etc." Sen said that some automakers have been asked by the tax department to divulge the cost of production of models in their line-ups and their selling price. However, the department has not yet made any tax demands from these car makers. He further rued that this initiative will create a negative image of India among global automobile manufacturers.

Car makers are not the only ones to be attacked by the tax department as multinationals like Vodafone Group, Nokia, Cadbury and Royal Dutch Shell facing deep waters as well. They have been notified of revealing details of how they calculate tax payments. However, the government tax claims have been disputed by these companies. Now it remains to be seen how car makers respond to these probes.