Maruti Suzuki India’s (MSIL’s) proposed factory in Gujarat is faced with a technical hurdle.

In the process of reworking the state support agreement (SSA), thanks to the new scheme proposed by MSIL, the state government is learnt to have objected to offering value added tax (VAT)-related concessions twice, once to the manufacturer and then again to the seller. MSIL has been asked to suggest a new formula.

After the company’s board of directors had approved the plan that the Gujarat plant would be built by a wholly owned subsidiary of MSIL’s parent company, Suzuki Motor Corporation (SMC), MSIL had officially approached the state government in January to incorporate the changes in the SSA. Around March, the proposal was referred to the finance department for review, after being discussed in the chief secretary’s committee on mega projects.

In a meeting earlier this week between the chief secretary and company representatives, the state government is learnt to have objected to being asked to offer VAT refund to the SMC subsidiary and then again to MSIL. By the original agreement between MSIL and the government, MSIL was both producer and seller. In the revised scheme of things approved by MSIL’s board, the production would now be by a new company, Suzuki Motor Gujarat Pvt Ltd (SMGPL), a wholly owned subsidiary of SMC. SMGPL would exclusively manufacture and sell vehicles to MSIL.

A senior state government officer said, “Now, SMGPL becomes the manufacturer, and MSIL is the distribution agent. The company has sought VAT refund at both these stages, when SMGPL sells the vehicles (at cost price and no profit) to MSIL, and then again when MSIL sells these cars in the market. In a way, the VAT refund then becomes two-fold, and there arises a technical problem.” The government and the company now need to decide how the tax benefits would be divided between MSIL and SMGPL. “MSIL has been asked to come up with a fresh formula, while the state government would try to think of an alternative, too,” the official added.

A company spokesperson said, “We are in regular discussion with the Gujarat government to clarify and resolve any issues that might arise. We are not able to disclose the contents of the discussion at this stage.”

In June 2012, MSIL had signed an SSA with the Gujarat government for purchase of land and setting up of a manufacturing facility. SSAs typically contain guidelines related to payment installments, dates of commissioning, etc. MSIL has been offered a refund of VAT for 15 years, provided the amount did not exceed the company's investment in the state.

When asked if the cap for VAT refund offered to the company could be lowered to accommodate a two-fold VAT refund, the officer said it was highly unlikely. “It is more of a legal-technical issue, when the government cannot offer a VAT refund to both entities for the same product at two different points in time,” he said.