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Maharashtra government, automakers reach agreement over VAT
September, 05th 2014

After three years of extensive deliberations on the contentious VAT refund incentive issue, the Maharashtra state government and automakers from the state have reached an agreement, thus paving the way for a slew of fresh MoUs worth over Rs 11,510 crore.

Mahindra & Mahindra and Tata Motors have renewed plans to invest Rs 4,000 crore each in the state, while two-wheeler maker Bajaj Auto has plans to invest Rs 2,000 crore and Volkswagen India about Rs 1,500 crore by 2021. The proposed investments by the automobile companies are likely to create about 5,000 direct jobs at the manufacturing plants and another 10,000 and 15,000 jobs indirectly.

Maharashtra chief minister Prithviraj Chavan agreed that the change of policy in 2011 had adversely affected the automotive companies in the state, but asserted that 'it was a perhaps an error of judgment or inadvertent mistake,' and the government has corrected the issue.

Maharashtra will again emerge as the most favoured destination for investment in the automotive sector. In recent years, the state lost out to Gujarat and Tamil Nadu which attracted investments by virtue of more generous tax sops.

"The decision taken recently makes us the most attractive destination to invest in the auto industry. I can claim that no other state has offered such a package of incentive as we have," added Chavan. "What you are seeing today is an example of how the government of the state can make it easier to do the business, can help the business and facilitate it," Anand Mahin dra, CMD, Mahindra &Mahin dra, said.

The VAT benefits that compa nies will get will be on gross basis instead of net basis. With full 100% gross VAT refund proposed under the new ultra mega project for investments over Rs 1,500 crore, automakers are now encouraged to invest in Maharashtra.

Earlier, aggrieved by the amendment in VAT refund poli cy in 2011, both M&M and Bajaj Auto had expressed intent of considering other states for future expansion.

Pawan Goenka, ED, M&M told ET, "Under the new scheme, M&M will get a gross VAT refund of 12.5% of what we sell in the Maharashtra state (15% of overall sales) which will lead to an improvement of 1.8% over the earlier net VAT refund scheme. I cannot talk about other companies, but for us the investment cycle begins from tomorrow. We are confident with this investment and turnaround in market and M&M's marketshare will go up and, therefore, if we don't invest today, then we may not have capacity tomorrow."

Under a 2005 industrial policy, the Maharashtra government had announced a VAT refund to companies that invest more than Rs 500 crore in the state.However, the policy was silent on what constitutes "final sale" in the state. To take advantage of that loophole, many automakers set up marketing or distribution arms, and sold all vehicles manufactured in Maharashtra to their sales arm before selling them in other states in order to claim VAT refund on the entire production.

This drained the government coffers and post the amendment, the scheme of selling to sales arms of companies was stopped.Now, as part of the new policy, the government proposes a cap of 12.5% of the claimable VAT in a financial year.

While M&M will raise the capacity at the Chakan plant from 3.2 lakh vehicle currently to 4.5 lakh units in 18 months and eventually to 7.5 lakh units in seven years. Volkswagen India will invest fresh proceeds in a diesel engine plant and for backward integration.

Bajaj Auto proposed an investment of Rs 2,000 crore in two phas es for capacity expansion from 2.28 million to 3.84 million units.

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