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 Understanding VAT refunds

Chavan govt seeks E&Y help on tax relief to state auto majors
November, 15th 2011

With automobile majors seeming to prefer investing in neighbouring Gujarat, plus a new and growing dispute with the industry on tax refunds, the Maharashtra government has turned for help to consultants Ernst & Young (E&Y).

In recent months, Maruti Suzuki, Ford and Peugeot turned away invitations to invest in Maharashtra and decided they would rather do so in Gujarat. Now, Bajaj Auto, Mahindra & Mahindra and Volkswagen, the majors already in the state, are demanding changes in a new tax rule.
 
This is on a refund of value added tax (VAT) on auto sales. Earlier, the companies would formally sell their entire production from the manufacturing arm to the marketing and sales arm, to claim a VAT setoff for sales within Maharashtra. The marketing arm would then, in effect, bill this to other states across the country. However, under a revised rule, the companies would not be able to claim the VAT setoff on products sold outside the state.

The new rule took effect from April Mahindra & Mahindara, Bajaj Auto and Volkswagen had opposed it. They say their bottom line had been badly hit. As reported earlier, state industries minister Narayan Rane has backed them, saying his ministry had appealed to the chief minister and the finance minister to revisit the setoff rule.

Chief minister Prithviraj Chavan acknowledges the need to do something, saying: We are exploring a slew of options to provide relief to the auto industry.

E&Y is expected to give a report by end-December. One option is providing VAT refund to all 100 per cent export oriented auto units. The government is also exploring a package of incentives to auto units going for expansion in Maharashtra.

State industries secretary K Shivaji told Business Standard, Right now, export-oriented units in the auto industry do not get VAT refunds. I have told E&Y to look into the parameters and the structure for providing such an incentive. Objectivity will be crucial for deciding the nature and quantum of refund to these units.

Shivaji said the auto companies had been asked to provide their views before Ernst & Young finalises its report.

 
 
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