The ordnance factories have just woken up to a notification that followed the finance budget, which brought these organizations under the central excise ambit.

The duty will be applicable from June 1 onwards. With just 10 days left, the factories will now have to race against time to fine tune their accounting systems for the new tax regime. Not only will the tax have to be shelled out, a substantial CENVAT credit needs to be calculated by the factories, said sources.

This was a part of the budget fine print. In the typical manner in which government notifications are drafted, the products of ordnance factories were silently included in the list of excisable items.

The Ordnance Factory Board (OFB), all this while, remained blissfully ignorant about the new rule under the impression that as a government body there was no question of bothering about taxes. Only recently, the headquarters informed the factories down the line about the tax component.

Though funds in lieu of items supplied to the armed forces are not received in cash, and only book adjustments made, it will certainly add the bill by another Rs1,000 crore. This means the amount to be spent by the defence forces will increase proportionately, though only on paper.

However, since the expenditure has to be booked, it will have an impact on the defence budget, with a likelihood of purchases being curtailed, said sources. On the other hand, if defence expenditure goes up, the finance ministry will need to factor an increase in revenue mop up.

The matter was taken up with defence minister Manohar Parrikar when he met the OFB chairman and other senior officers during his visit to the city. He was told the factories hardly have any time to comply with the tax regime, as some of the consignments have already been dispatched without computing the tax. Sources say the minster assured to take up their cause.

Similarly, even the workers unions met Parrikar on the issue. They were apprehensive that after central excise even the states may start levying taxes. However, the minister said that may not happen.

This will also hamper the competitiveness of factories as against private industries, for which the defence sector is now being opened up, say ordnance factory sources. They claim the government organizations work under several constraints as against the private sector. However, the private sector says the move may level the playing field.

"Ordnance factories have to go through the entire process of tendering and choosing the lowest bidder. Even the smallest of the expenditure needs permission. Private industries on the other hand have a free hand," said a source in the factory.

"Ordnance factories should not be treated as commercial organizations since they were set up to meet the country's strategic needs," said a retired officer.