Pre Budget Memorandum

• Total tax incidence on auto products
• High and varied rate of road taxes
• Embedded tax structure
• High interest rates
• Overloading on commercial vehicles
• No policy towards replacement of vehicles to promote cleaner environment and fuel efficient vehicles
• No special incentive for automobile exports (Focus product scheme)
• Duty drawback rates that were already low and not compensating for the duty being paid, decreased further to enhance the worries of the industry
• No certainty over exclusion of automobiles in the FTAs/PTAs being negotiated to protect existing investment or to encourage future investment.
• Low growth of Export markets

The industry has potential to grow to become a major economic contributor. The Government also recognizes the importance the automobile industry holds in the Indian economy and hence is currently working on Automotive Mission Plan 2026 to set targets for the industry for the year 2026 and to suggest interventions that would be critical for growth of the industry. The industries identified by Prime Minister for “Make in India” also include the automobile and auto component industry.

Moreover, India is still highly under penetrated. In India, there are only 18 passenger vehicles per’000 population, 5 commercial vehicles per’000 population and 91 two wheelers per’000 population. Globally, these figures are substantially higher. For instance, Germany has an estimated 518 cars per’000 population, Japan has 457 cars per’000 population and Thailand 68 cars per’000 population. In case of Commercial vehicles, the penetration in various countries is much higher – 388 in the USA, 121 in Japan, 86 in Thailand, etc. In two wheelers also, countries like Thailand (248), Indonesia (216), Japan (98), Germany (72), etc have much higher penetration.

1. Continue with the concessional excise duty rates beyond December 31, 2014
2. Excise Duty Rates for Components and Parts falling under Chapter 8707, 8708, 8714 and 4011 should be reduced to avoid CENVAT credit accumulation at the OEMs.
3. Excise Duty & Custom Duty Concessions on Identified parts of Hybrid/ EVs parts should be extended to all parts used in manufacture of electric vehicles and the extension should be extended for a longer period instead of till March 2015.
4. Address the financial difficulty caused by differential excise duty on component and vehicle which is affecting the companies with manufacturing units in tax free zones of hilly states.
5. Multiple tax levies, including basic excise duty, Automobile Cess, NCCD, Education Cess, Higher Education Cess, needs to be merged into a single rate of Excise duty
6. Introduce GST across all states and share the draft modalities & procedures now. Industry needs minimum 3 months for smooth transition. Taxation of Used vehicles should be covered as well as all taxes including road tax should be subsumed in GST.
7. 1% NCCD on Vehicles should be withdrawn. Until the time NCCD is not withdrawn, Payment of NCCD from CENVAT should be allowed (finalize the draft circular issued in September 2012)
8. 4% SAD should be abolished
9. 2% CST to be reduced to 1% as was proposed by Government when the announcement for implementation of GST was made.
10. Legislative amendment required to Central Excise Act  - Excise duty should not be applicable on Sales Tax/VAT benefit given by state government (Supreme Court judgment in case of Super Synotex and Maruti Suzuki)
11. Excise duty rate for chassis of ambulance should be reduced
12. Excise duty on chassis of refrigerated motor vehicle needs to be reduced
13. Retain Customs tariff on CBUs for Cars/ MUVs/ Passenger 3-wheelers under Tariff Heading  - 87.03  and Two-Wheelers/ Goods Three Wheelers under Tariff Heading  - 87.11, while increase the custom tariff on Commercial Vehicles falling under Tariff Heading  - 87.02 & 87.04 to 40%.
14. Incentivize replacement of vehicles, which were registered before the year 2000 when the first emission norms were introduced in India.
15. Depreciation rate for Motor Cars, MUVs and 2 wheelers, other than those used in the business of Hire, irrespective of the period of addition should be raised to 25% from 15%
16. Deduction of interest paid on vehicle loans by an individual should be allowed for income tax calculation (like in case of Educational loan).
17. 150% weighted deduction for expenditure incurred in skill development should be expanded to cover ITIs, Diploma Institutes and other institutes including manufacturers’ own training institutes, etc. from where the industry meets its skilled manpower requirement.

DIRECT TAX

1. The Basic Exemption Limit for personal income tax needs to be increased upto Rs 5 lakhs (inclusive of medical expenditure allowance and transportation allowance)
2. Benefit of investment allowance should be allowed for new Plant and Machinery acquired and installed during the period beginning from 1st April, 2013 and ending on 31st March, 2017.
3. Benefit of Additional Depreciation should be allowed on Plant & Machinery put to use for less than 180 days
4. Provision for Non-deduction or non-payment of TDS on payments made to non-residents
5. Common Authority to assess the Transfer Prices under Customs Laws and Direct Tax Laws.

CENTRAL EXCISE DUTY

1. Removal of time limit for availment of Cenvat Credit for Inputs and Input Services
2. Definition of “Inputs” should be rephrased to include “in or in relation to manufacture”
3. Definition of `input’ under Rule 2 (k) of the Cenvat Credit Rules, 2004 should have an explicit clarification that exclusion is not applicable to chassis for motor vehicles.
4. Assessment under Rule 8 of the Central Excise Valuation Rules, 2000 should allow for use of earlier years’ cost data in a few cases
5. Recovery of duty in respect of demand confirmed against an assessee from another person should be applicable only in cases where the High court or the Supreme Court has rejected the appeal of the assessee.
6. Personal penalty provision should be removed from the statute or alternatively suitable departmental clarification should be issued
7. Offences under excise law should not be cognizable and non-bailable
8. Method of investigation used by excise officers time taking and cumbersome
9. Clarification required in definition of job worker for valuation under Rule 10A of the Central Excise Valuation Rules, 2000

CUSTOMS DUTY

1. CNG/LPG vehicles should also get special concessions like Hybrids vehicles.

SERVICE TAX

1. Service tax under reverse charge method should only be paid by the service provider, except when service provider is located out of India
2. Definition of input service should be reframed to provide credit of all services procured by assessee for which service charges are paid/payable by the assessee
3. CENVAT Credit Rules, 2004 [Sl.No.7 to Notification no.26/2012] needs to be amended to provide unconditional abatement of 75% in case of transport of goods by road by GTA.
4. Benefits of CENVAT needs to be extended in respect of service tax which is incurred on the services received by the principal manufacturer for this business by an outsourced partner.
5. Interest on delayed payment of service tax should be corresponding to interest applicable under Central Excise Act & Customs Act (which is 18%).
6. CENVAT credit of all services used in construction or setting up of factory / factory building should be allowed.
7. Recovery of duty in respect of service tax demand confirmed against an assessee from another person should be applicable only in cases where the High court or the Supreme Court has rejected the appeal of the assessee.

OTHERS

1. Stay of demand is granted by ITAT should be allowed beyond 365 days until the disposal of appeal in cases where delay is not attributable to assesse
2. Special TP Bench in the Income Tax Appellate Tribunals to hear TP related appeals.
3. The Deemed Transaction under Transfer Pricing need to be dropped, as payments towards services received are subjected to TDS on gross basis. In respect of import of goods the same need to be controlled by SVB of the Customs department and should not be again scrutinized by the Income Tax authorities.
4. Rationalisation of  TDS rate needs to be done – one rate for all Nature of payment (excluding Salary and Foreign Payments)
5. Process of cutting and slitting of steel coils be also considered as amounting to “manufacture”.
6. Railway Siding”/containerized trains for transportation to be treated as infrastructure
7. Customs and Excise Benefits needs to be extended for procurement of Scientific and Technical Instruments, Apparatus, Equipments, etc by a Research Institution other than a hospital

The auto industry looks forward to introduction of GST. However, based on whatever inputs we got, there are several concerns of the industry which have been mentioned below:

Taxes to be covered/ subsumed

• All kind of domestic indirect taxes should be subsumed in the proposed GST, as suggested by Kelkar Committee. This should include Road Tax/Motor Vehicle Tax also.
• After introduction of GST, no additional tax should be introduced/ levied. A provision be made in the law that no new levy or tax be introduced. 
• Any change, if required, in future (for specific needs like calamity, education, infrastructure, etc.) should be done through modifying the rate of taxation under the GST regime and not through any additional levy/tax/cess, etc.
• Bring in used vehicle trade under GST framework with a token levy to make used vehicle trade more organized.
• 1% GST rate will provide substantial annual revenue to the exchequer.

Tax Rates

• The tax rate on inputs and output should be fixed considering the pattern of input purchase and output sales which varies considerably. This has implications for the input tax credit. While vehicle manufacturing takes place in a few states with supply to other states (local sales account for less than 10% of total domestic sales), majority of components (around 70% - 80%) are procured from vendors within the state. If tax rate of components/inputs is more than the tax rate at the time of supply of complete vehicles (Completely Built Units), then refund would arise. Hence, to avoid that, it is suggested that
  1. Uniform rate of tax should be charged on complete vehicles (whether by way of sale or by way of transfer) and inputs, against which input credit should be allowed.
  2. Tax paid on complete vehicles on movement from factory should be made available as input credit to the vehicle dealers.
  3. Manufacturers could give state-wise break-up at periodically to respective state governments who may settle it through appropriate clearing house mechanism.
• Considering the current level of taxation, a suitable tax rate may be adopted. Tax rates should be uniform across states and there should be one authority to which payment would be made by way of one challan.

Tax Base & Levy

• Goods and services should be classified on the basis of HSN and GATTS (at both central and state level).
• A common base should be adopted for taxation of both Central and State GST. Under the present taxation system, interstate sales tax and local sales tax is levied on excise duty in respect of the manufactured goods resulting in cascading of taxes.
• In case of non-sale, where transaction value of goods or services is not determinable and when GST is charged, a simple mechanism of valuation could be adopted on the basis of cost.
• Under GST, it is suggested that the basis of tax credit should be on ‘Cost to Business’, i.e. any tax which is paid and forms cost to business should be allowed as tax credit, both at the Central & State level.
• The document based credit should also be dispensed with and could be substituted by appropriate certification by independent Chartered Accountant (or the Appointed Company Auditors).  The same could be subject to appropriate audits by trained government officers and could be IT enabled.
• Diesel and motor spirit should be brought under GST with input tax credit and mechanism to avail the same. VAT on diesel and motor spirit constitutes a significant element of cost for the transport industry. It is suggested that total chain of input credit should remain unbroken and hence, all inputs should be treated equally for the purpose of allowing input credit.

Others

• In the proposed GST system, it is not known whether stock transfer would remain exempted from tax (at present, sales tax is not levied on Stock Transfer) or would be made taxable in the importing state; the industry needs to understand the treatment of stock transfers for the purpose of input tax credit.
• There should be no distinction between input and capital goods. Presently, definition of Capital Goods under Central excise law and state VAT is not uniform. Under State VAT, definition of capital goods and also the rate of taxation vary from state to state. As regards periodicity of taking credit, excise and VAT laws differ.
• In respect of existing exemptions having sunset clause, appropriate transitional provisions should be introduced to ensure continuity of existing benefits. A clarification is needed on how the existing sales tax benefit schemes e.g. loan, deferral would be affected.
• The State Goods and Services Tax Act, State GST Act should be a common Act operated/implemented by all the states and Union Territories (similar to present Central Sales Tax Act) covering transactions related to goods, services and exports.
• Concept of ‘Tax Invoice’ should be continued for availing State GST credit.
• To ensure viability of EOU under severe competition, timely refund of tax is needed. Effective refund system should be in place for smooth operations of EOUs.    Presently, EOUs are eligible to get refund of CST on interstate purchase of inputs used in the production of export goods and local VAT content of the export product is allowed to be deducted against the DTA Sales and the balance, if any, is allowed as refund.
• Under a dual GST structure (a Central GST and a State GST), there could be a situation where the Input Tax credits which remain unutilized would be refunded to the assesses.   Since the cross utilization of credits between the Central GST and State GST are not permitted, there could be a situation of payment on the one hand and a refund situation on the other.  In order to avoid this situation cross utilisation of input tax credits should be allowed.
• Procedural changes should be notified in advance. The industry should be given 6 months lead time before introduction of GST.
• State specific incentives should be protected under GST.

1. Background

With a view to combating deteriorating air quality, stringent environmental regulations are being mooted. The automobile industry in India has been meeting these challenges. In recent years, the industry has made significant investment to produce safer and increasingly environment friendly vehicles.

The Bharat stage-1 norms for vehicles were introduced in India in April 2000. These norms were then progressively tightened to BS-2, BS-3, and today four wheelers manufactured since the year 2010 in major cities meet Bharat Stage-4 emission norms, which are more than 50 to 80 percent cleaner than the vehicles that were produced before April 2000.

In order to improve the environmental performance of new vehicles further government has plans to introduce BS-5 emission norms in 2020 and BS-6 in 2024 onwards. This policy lays the foundation of control of emissions from vehicles sold in the country.

However, whilst the new vehicles are cleaner and meeting stringent emission requirements and a continuous plan is being evolved by the government of India to further improve the emission performance of these newly manufactured vehicle, the benefits are not getting reflected in the ambient air quality due to the presence of a large number of old and ill maintained polluting vehicles, which continue to ply on the roads, in the absence of an efficient scrappage/fleet modernisation policy in the country.

2. Need for Fleet Modernisation in India

The Automotive industry in India over the years has become instrumental in the growth of R&D in the country through localization and indigenization of technology over the past few decades. Several players have undertaken acquisitions and forged alliances with multinational firms to gain technical know–how and fast–track their progress on the technology roadmap.

However, at present, India does not have a robust national policy on retirement of vehicles or end-of-life of vehicles. Hence, it is important to capitalise on the developments that the industry has catalysed in the country, over the last two decades. Vehicle users in India tend to continue to use their vehicles, well beyond the expected life of the product. Such old vehicles have:

1. Higher emissions
2. Lower fuel efficiencies
3. Lower safety standards

which will address all the above challenges and also improve the image of the in use vehicles on our roads. Additionally, fleet modernization of government departments can also be included.

3. Approach for Scrapping of vehicles

World over vehicle scrappage and fleet modernisation is regulated through an end of life policy, which is implemented through a robust Inspection and Certification system. Notwithstanding a robust I & C system in countries like Europe, etc. even these countries had to resort to schemes like Cash for Clunkers for weeding out old and polluting vehicles and replacing them with new environment friendly ones.

In India I & C system is now in the process of being set-up. Having started late, the Indian I and C programme can be expected to become operational only after 4 to 5 years. Secondly, I & C for private vehicles is yet to be conceptualised in India, as the present programme is limited to Commercial Vehicles. All these reasons point to an urgent need for an alternative initiative to cleanse the Indian roads of old and polluting unsafe vehicles, till the time the I & C mechanism takes root in the country.

SIAM would suggest that in order to mitigate immediate air quality problems and decreasing the menace of road accidents, rather than a mandation, a limited-time incentive scheme for retirement of old vehicles is required.

A cut-off point of 15 years vintage is considered for all vehicles, for replacement under the fleet modernisation programme. Similar schemes have been successfully implemented in some of the countries, such as, the USA, Canada, the UK and Italy by providing fiscal incentives and concessions for replacement through a single window fleet modernisation programme. The accelerated fleet modernisation programme in the USA allowed owners to voluntarily retire their older vehicles emitting higher pollution. The primary objective of fleet modernisation programme was to reduce pollution by accelerating normal fleet turnover so that new, cleaner vehicles can be put into use sooner than would occur in the normal course. The impact of incentive schemes in the countries had been encouraging.

This concept was also recommended in India’s Auto Fuel Policy released in October 2003 (page 6 point 24), which is a Union Cabinet approved policy document and still guides India’s automotive emission control and fuel policy, but this particular recommendation has still not been implemented. The policy states: “... Schemes combined with incentives would be developed for the replacement of old polluting vehicles.” It would help in removing older, potentially polluting and unsafe vehicles from the road. The replacement of these older vehicles would also have an additional favourable impact on the economy. This programme would generate additional demand for new vehicles and make the scheme potentially revenue positive from the government’s point of view.

Also, the country would benefit by way of reduction in expenditure on account of fuel saving by retiring old vehicles and replacing them with more new ones, which are more fuel efficient. Most importantly, the reduction in pollution would lead to substantial health benefits and the resultant reduction in cost of medical treatment, reduction in premature deaths, reduction in man days lost on account of illness and so on.

Therefore in India, this scheme will have benefits of reducing pollution, reducing fuel consumption and improving safety (reducing fatalities from 130,000 people presently killed annually in road traffic crashes).

The fleet modernisation programme should encompass all vehicles, both private and commercial use with a cut-off point of pre 2000 vintage.

Keeping in mind the socio-economic and political implications that the scheme may have, it should focus on incentives rather than simple mandates. In the present Indian scenario, it seems more feasible to encourage people rather than to force them to replace their old vehicles with new ones.

The proposed scheme requires support from both the State Government and the Central Government. The Governments at both levels would need to come together to make this programme successful by providing fiscal incentives for fleet modernisation.

4. Implementation

• For successful implementation of the scheme, following elements are critical:

1. Encouragement to the last owner to scrap the old vehicle
2. Provision of environment friendly scrapping of the vehicle by notified agencies eg: MSTC, in the presence of RTO officers.
3. RTO to de-register the vehicle and issue a Scrappage Certificate to the registered owner.
4. Scrappage Certificate to be treated as a tradeable certificate for availing of tax concession on purchase of new vehicle

These elements are explained in more detail in the scheme as detailed in the following sections.

To encourage old vehicle owners, government should incentivise by way of waivers:

• 50% waiver of Excise duty
• 50% waiver of Sales tax
• 50% of Road tax

This will be a revenue positive proposition since the waivers are being given only on incremental sale of vehicle, which will be possible only if the old vehicle is scrapped.  In order to initiate this scheme, the Road Transport Authorities should authorise nodal agencies eg: MSTC in setting up Scrap Yards across the country.

To avail incentives, at the time of delivery of the new vehicle, the old vehicle has to be necessarily scrapped. A suitable mechanism has to be evolved to ensure destruction of the old (exchanged) vehicle. The Certificate of Destruction (CoD) will be issued in the name of the registered owner by the State Road Transport Authority.

5. Replacement Scheme across India

Given the profile of vehicle population in India, the suggested scheme would offer an effective solution to the problem of vehicular pollution faced by India. This scheme will be valid and operational across India.

6. Steps for Availing the Scheme

All vehicles manufactured on or before April 2000, the year Bharat Stage-1 was introduced, would qualify under the Project Modern Fleet vehicle replacement scheme from 1st April 2015.

• Step-1: The last owner of the old vehicle decides to avail the benefit of the scheme ‘Fleet Modernisation’, only for purchasing a vehicle of same category.
• Step-2: The vehicle owner visits the nearest vehicle dealer for purchasing a new vehicle, with all necessary documents of the old vehicle. At the time of availing the scheme, it should be ensured that the vehicle has all valid documents, such as Road Tax receipts, Insurance, etc.
• Step-3: The customer hands over the old vehicle to the dealer who further sends it to the scrap yard for scrappage. The dealer will inform the customer that Certificate of Destruction (CoD) could be collected after a few days – may be a week – once the vehicle is completely scrapped.
• Step-4: The Dealers are expected to send all the collected vehicles to the authorised scrap yards, eg: MSTC for scrapping of the vehicles in an environmentally safe process under due supervision of the regional transport authority. The revenue generated by selling the old vehicle to the scrapyard, eg: MSTC will be distributed among the two parties at the ratio of – Dealer (15%) and Customer (85%).
• Step-5: The Regional Transport Authority issues a valid Certificate of Destruction (CoD) and will de-register the scrapped vehicle.
• Step-6: The CoD should necessarily contain all the information given in the registration certificate, such as date of manufacture of scrapped vehicle, model, engine capacity, fuel used, gross vehicle weight (GVW), etc.
• Step-7: Once the customer received the CoD, he or she is entitled to incentives against purchase of a new vehicle, of the same category as that of the old one. The invoice for the new vehicle will reflect a value equivalent to 50% of the Road tax and Sales tax and deduct additional value of 50% of the Excise duty for the vehicle. However, the total rebate of Sales tax and Excise duty together may not exceed a pre-determined value. This CoD would be tradeable within the State/Union Territory where the scrappage took place.
• Step-8: The vehicle dealer receives a copy of the CoD. The dealer could be authorised to give any new customer a new vehicle, of the same category registered in that State, with the agreed discount/incentive. The dealer will pay the rebated Sales Tax amount on the basis of the CoD. Similarly, the manufacturers will adjust the Excise Duty rebate amount in their current PLA/ Credit Account against the CoD, as per the present practice of excise duty refund for Taxis.
• Step-9: The CoD is to be treated as a tradeable instrument having jurisdiction within the state. i.e. if a vehicle is scrapped in Mumbai, the benefits of the scrap certificate should be available during purchase of a vehicle anywhere within the state of Maharashtra. The certificate should be made tradeable also within the state.

7. Preliminary estimation of benefits

Revenue

Assuming that all vehicles sold under the programme are replacements and as such additional sales, over and above the normal sale, there will be a revenue positive impact.

It is estimated that the above scheme would initiate a replacement of about 24.2 million Private vehicles and 3.2 million Commercial Vehicles, in the above eight States. Similarly, it can be extended across the country. Hence, from the above table, having data for the eight states, we can easily estimate that the revenue generation for the government, across the country, would be significantly higher than the amount generated in eight states.

Emission Benefits

Analysis shows that 60-80% of pollutants generated by on-road vehicles are from older vehicles (>10 years of age), which constitute just 20-30% of the total vehicle population. Emission benefits by replacement of Commercial vehicles older than 15 years and private vehicles more than 10 years old in India would result in about 80- 90% reduction engine out emissions from the new fleet. The reduction from each pollutant for the given fleet replaced is indicated below. Therefore, by retiring older vehicles, the impact on air quality would be significant.

Fuel Savings

Further, older vehicles consume more fuel as compared to newer vehicles with modern technology. It is estimated that that the amount of petrol consumed nationally could reduce by about 5%, if older (>10-15 years of age) vehicles are replaced by newer vehicles.

It is estimated that if more than 15 year old Two-Wheelers are replaced with new Two Wheelers, Passenger Cars and Commercial Vehicles in these Seven States, which would obviously have better Fuel efficiency, then the total fuel saving would be in the tune of 7,862 million litres of saving per annum. This translates to about Rs 490,000 Crores of saving for the country.

Road Maintenance

Fleet Modernization programme could contribute to reduction of annual Operation & Maintenance costs by 8-10% and periodic maintenance costs by 20-25%. It is estimated that approximately 8-10% of annual O&M costs and 20-25% of periodic maintenance costs of highways can be attributed to vehicular related factors, such as overloading, poorly maintained vehicles, etc. Old and poorly maintained vehicles contribute a proportion of these costs.

Image Building

It is estimated that currently less than 1% of vehicle population is retired annually in India, but none of these vehicles is officially de-registered. A majority (70-80%) of these vehicles is more than 15 years of age and is scrapped on account of accident, old age or government norms.

Existence of such old fleet affects the image of the country, which is the world’s second largest two wheeler and bus manufacturing country, seventh largest commercial vehicle manufacturer and sixth largest passenger vehicle manufacturer.

Other Approaches for supplementing the Modern Fleet Scheme

In order to discourage people from running old polluting vehicles, the rate of road tax and rate of premium on motor vehicle insurance could be increased progressively with the age of the vehicle.

1. The manufacturers of commercial vehicles, inter alia, manufacture chassis for motor vehicles and get bodies for goods or passenger transport application built thereon from the outside independent body builders. The chassis are classifiable under Chapter Heading 8706 – `Chassis fitted with engines, for the motor vehicles of heading 8701 to 8705’. For this purpose, the chassis are sent to the body builders on payment of duty. The body builders build / fabricate body on the chassis to get motor vehicles falling under Chapter Heading 8702, 8703 and 8704. Such activity of building body amounts to manufacture of a motor vehicle, in terms of Chapter Note 5 to Chapter 87. Thus as per the Central Excise Tariff, Chassis is a different article and it gets converted to motor vehicle on building a body thereon or fabrication or mounting or fitting of structures or equipments thereon.
2. There are two entries in exemption Notification No. 6/2006-CE dated 1.3.2006 viz., Sr. No. 39 & 41, both of which are reproduced in the Annexure attached .for ease of reference. The said entries have been retained after 01.04.2011 and are in fact continued by Budget 2012 vide identical entries no. 276 & 288 in Notification No. 12/ 2012. The body builders do not avail the above exemption in respect of chassis supplied by chassis manufacturers. Therefore, the body builders avail credit of excise duty paid on chassis and utilize such credit to pay duty on value of fully built motor vehicle which obviously includes the value of chassis. Chassis is thus direct input in the manufacture of motor vehicle.
3. The definition of “input” inserted w.e.f. 1.4.2011 in Rule 2(k) of the Cenvat Credit Rules, 2004 excludes “motor vehicles”. Kindly refer clause (D) in the definition of input. The expression “motor vehicles” has not been defined in the Cenvat Credit Rules, 2004.
4. If a view is taken that chassis is not “motor vehicle”, then chassis would not be excluded from the purview of “inputs” and consequently, chassis would be eligible for Cenvat credit to body builders engaged in the manufacture of motor vehicle. In such a scenario, there would not be any difficulty in availing credit. However, if a view is taken that chassis is “motor vehicle”, then a literal reading of the definition of “inputs” would lead one to conclude that chassis has been excluded from the purview of “inputs” and consequently, chassis is not eligible for Cenvat credit to body builders engaged in the manufacture of motor vehicle. This will have serious implications for automobile industry.
5. In our view, since chassis is a direct input used in the manufacture of motor vehicle, there is no doubt that Cenvat credit on chassis is available. However, out of abundant precaution & to put such a controversy beyond doubt, we are requesting for suitable clarification/amendment. This request was also made by us in the `Post Budget Memorandum for 2011’ and the `Pre Budget Memorandum for 2012’.
6. We submit that the Cenvat credit on chassis cannot be denied for following reasons:

   (a) A look at the definition as a whole would show that the scope of “input” depends upon functional use. For illustration, input means goods used in the factory or goods used for providing any output service. The functional utility test has been applied by the Apex Court in number of cases. Hence, if goods are used as motor vehicle, then it would be disqualified as input. However, if the goods are not used as motor vehicle but as part or component in the further manufacture, then it cannot be said the goods have been functionally used as motor vehicle. In other words, where chassis is used in the manufacture of motor vehicle, then it would be qualified as input since it satisfies the functional utility test on being “input”. Further, chassis is a direct input in the manufacture of motor vehicle by the body builder. Moreover, the body builders discharge their duty liability on the value including value of the chassis.

   (b) The above also follows from clause (C) of Rule 2(k) which excludes “capital goods” & such exclusion is not applicable when the “capital goods” are used as parts or components in the manufacture of final product.

   (c) In the Central Excise Tariff, Chapter Headings 8702, 8703 & 8704 specifically refer to motor vehicle. Chapter Heading 8706 refers to chassis fitted with engines for the motor vehicle. Thus, a clear distinction has been made therein between the motor vehicles and chassis. Similarly, Chapter Note No. (5) to Chapter 87 also provides for construing body building of `chassis falling under Chapter Heading 8706’ as amounting to manufacture of motor vehicle. This also distinguishes motor vehicles from chassis.

   (d) In the recent Union Budget, under Rule 2(a) (A) (viii) and (B) of the Cenvat Credit Rules, 2004 certain motor vehicles and their chassis have been specifically referred to in the definition of `Capital Goods’. If motor vehicles included chassis, there was no requirement for the provisions to mention `chassis’ in this definition. Thus, wherever legislature intended to refer to the chassis, it has been specifically mentioned. There is no need to import the words which do not exist in the definition of `input’.

   (e) Prior to 1.4.2011, there was no ambiguity and credit was available to a body builder if it so desired. The ambiguity currently faced is result of change in definition of “inputs” w.e.f. 1.4.2011. The change in the definition of “inputs” w.e.f. 1.4.2011 should not result in change in legal position since there is no apparent reason for change in the stand of the Government as far as body building industry is concerned. In fact, the entry nos. 39 & 41 in Notification No. 6/2006-CE dated 1.3.2006 as existing prior to 1.4.2011 contemplate situations where credit on chassis is not availed by the body builder while arriving at the value of motor vehicle. The above entries have been retained after 1.4.2011 & are in fact continued by Budget 2012 vide identical entries no. 276 & 288 in Notification No. 12/2012-CE dated 17.3.2012. The existence of entries in the form they existed prior to 1.4.2011, for period after 1.4.2011, shows that credit on chassis is available in law. It is therefore, submitted that there being no change in stand w.e.f. 1.4.2011, there should not be change in legal impact as well.

   (f) Guided by the definition of `input’ as it existed prior to 01.04.2011, maybe, the amendment w.e.f. 1.4.2011 was to restrict Cenvat credit on motor vehicles as “inputs” to the service sector & not to disturb the manufacturing sector. Inadvertently the manufacturing sector is being adversely affected.

7. In view of the above, we request for a suitable clarification / amendment in this regard for future as well as past i.e. period starting from 01.04.2011.

Background

(a) Excise duty is payable on transaction value of sale of vehicles i.e. price charged by seller from buyer. Sales tax and other taxes are to be deducted from above Transaction Value if such tax is actually paid/ payable on such goods.

(b) As a measure to promote specified areas and industries, various State Governments grant benefits to industries which are linked to the sales tax payable by these industries. Such benefits could be by way of :-

1. Exemption from payment of sales tax for a particular period.
2. Deferment of payment of sales tax for a particular period.
3. Grant of incentive equivalent to sales tax payable by the units.

(c) The Central Board of Excise and Customs examined the issue of exclusion of these amounts for computation of the value of goods on which excise duty is paid and addressed the same in Board Circular No.378/11/98-CX dated 12.03.1998. The Board in its said circular stated that only in situation (i) above, the sales tax is not deductible as no sales tax is payable by the assessee in accordance with the law. However for situation (ii) and (iii) above, the Board clarified that the amount of sales tax is deductible for the determination of assessable value of goods for levy of Excise Duty.

(d) The said circular of 12.03.1998 is still applicable even after amendment to Section 4 of the Central Excise Act with effect from 01.07.2000. This is evident from Circular No.679/70/2002-CX dated 04.12.2002 wherein the earlier Board Circular of 12.03.1998 was referred and it was clarified that where deferment of payment of sales tax for a particular period is allowed by the State Government as an incentive, interest on money retained by the assessee for that period cannot be considered as an “additional consideration” for levy of excise duty.

(e) It is also important to note that CBEC issued a Circular No. 671/62/2002-CX dated 09.10.2002 which correctly laid down the principle that only that amount of sales tax will be permissible as deduction under section 4 as is equal to the amount legally permissible under the local sales tax laws to be charged/billed from the customer/buyer. Thus where the local sales tax law entitles the seller to charge a particular amount as sales tax from its buyers, then the same must be allowed as a deduction from the transaction value even if later on the State Government, to incentivize the manufacturer, allows him to retain a part of the sales tax collected by him as a subsidy.

(f) On a broader perspective also, schemes of grant of incentive by the State Governments by way of retention of part or whole of sales tax collected are only methods for extending the benefits as they can be easily managed and accounted for. Alternatively, the State Governments could have collected the entire sales tax amount and thereafter, given back by issuing cheque for the whole or part of it to the same industries as subsidies, grants, etc. However such a methodology can be cumbersome for both the Government as well as the industries. It is for this reason that governments of various states adopt incentive schemes whereby industries are allowed to retain whole or part of the sales tax amount collected by them and the State Governments treat the retention as equivalent to full sales tax being paid by the assessee to the Government. Accordingly, retention of sales tax is the same as receiving grants from the State Government except for the number of steps involved, but the essence, intent and objective remain the same.

(g) Likewise, some State Governments also grant incentive by way of deferment of sales tax for a particular period or allow the assessee to pay a part of the sales tax amount upfront in lieu of deferment of sales tax to be paid after a particular period. There can be a situation where the assessee collects the sales tax from the buyers of its goods but deposits the entire amount to the State Government after a particular period, say 5 years. In such a situation, the Board vide its circular dated 04.12.2002 has already clarified that interest on money retained by the assessee for that period cannot be considered as an “additional consideration” for levy of excise duty. On the other hand, some states like State of Haryana, allow the assesse to pay 50% of the sales tax amount upfront in lieu of deferment of sales tax. Thus in essence the State Government allows the upfront payment of 50% of tax amount in lieu of payment of 100% tax after say 5 years. Thus, it is also in nature of interest which has been held by the CBEC to be not includible in the assessable value for excise duty payment.

(h) The judgment of Supreme Court in case of Super Synotex (India) Ltd and Maruti Suzuki India Limited

1. the Hon’ble Supreme Court in the case of Super Synotex(India) Ltd. has held that under the present provisions of Section 4 of the Central Excise Act which came into effect from 01.07.2000, a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, should be added to the assessable value of the product for the payment of excise duty.
2. A similar judgment has also been subsequently delivered by the Hon’ble Supreme Court in case of CCE v Maruti Suzuki India Limited (Civil appeal No.5183 of 2004)

Issues involved

(a) Thus, till the pronouncement of the above judgments by Hon’ble Supreme Court, the understanding prevailing in the government as clarified by way of CBEC circulars & industry was that a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, by way of deferment or otherwise, should not be added to the assessable value of the product for the payment of excise duty.

(b) Various manufacturers across the country and operating in different business segments are facing serious problems in light of this judgment of the Hon’ble Supreme Court in as much as the excise department is asking them to pay excise duty and interest on the sales tax incentive amounts granted to them by various State Governments.

Suggestion

It is suggested that suitable legislative amendments be made to solve problem relating to State Government incentives.Substance of amendment can be following:-

(c) The amount of sales tax collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, be considered as equivalent to sales tax actually paid under the excise law and thus should not be added to the assessable value of goods for excise duty calculation. This should be made effective from date of amendment.