The Central Board of Excise and Customs (CBEC) plans to provide some respite to automobile manufacturers in India. Auto makers have been facing tough times, wherein they have had to offer huge discounts on cars to battle the prevalent slowdown in the demand. On top of this, auto makers are also paying higher excise duties, something that has further hampered their profit margins. The CBEC had managed to get a favourable judgement from the Supreme Court in the Fiat case, wherein it will levy taxes on the cost of the production of a car rather than the discounted sales price. However, the board has decided to the ruling in a manner that it neither increases the hardship of auto makers nor affects the government revenues. Industry experts feel that this initiative by the CBEC could provide the much-needed respite to automobile manufacturers.
Notably, the verdict of the Fiat case turned out to be critical for the entire automobile sector. The Supreme Court, last year, had said that in case a company is selling cars at a loss for a prolonged period, it will have to pay the excise duty on the cost incurred during production along with a reasonable profit margin. Considering this favourable ruling, the excise department asked many automobile manufacturers to pay more taxes as they paid duty that was calculated on the discounted price. A reaction followed this decision, wherein prominent names in the industry took up the issue with the finance ministry as well as tax authorities.
Sources have claimed that CBEC is scheduling a meeting of chief commissioners to discuss this issue. The organisation aims to establish a middle ground so that government revenues are not hampered and also, auto makers get some kind of relief from the hardships they are facing. Commenting on the scheduled meeting, an official from the finance ministry said that "Industry has pointed at some practical problems related to some kind of discounts...At the moment, they are in discussion at the board level."
The sales for passenger cars have fallen for consecutive eighth month (till June), thereby forcing auto makers to give huge discounts. The condition of the commercial vehicle segment is worse as sales have been dropping for over a year now. Vishnu Mathur, Director General of Society of Indian Automobile Manufacturers (SIAM), said, “There are different scenarios where the auto industry may be forced to sell their products below cost price. So, as an industry body, we have said that the 'Transaction Value' should continue to be the sole criteria for the department to charge tax."
There are various situations in which car manufacturers have to sell vehicles at a rate below the cost price. Notably, this is a trend followed by companies in a weak market or when they are required to clear excess inventory. Apart from this, even if the volumes are as per the plan, the overhead costs might increase and compel the auto maker to sell at a lower price.
Commenting on the situation and the ministry's attempt to solve the matter, Bipin Sapra, Partner at Ernst & Young, said, "A clarification or a retrospective amendment in law is required, so that valuation in case of unrelated buyers is on transaction value and any perceived consideration which can't be qualified, accruing to the seller, can't shift valuation to a cost-plus basis."
