The Hindu Business Line : An unfounded fear

The Finance Minister, Mr P. Chidambaram, in his first stint in that role made certain seminal if arguably debatable changes in the tax regimes in 1997. In the direct taxes front, they were introduction of Minimum Alternative Tax (MAT) on companies that had the cheek to show handsome profits in their books even while thumbing their noses at the taxman and exempting dividend from tax with a concomitant introduction of Dividend Distribution Tax (DDT) on companies. The Maximum Retail Price or MRP-based valuation regime for select excisable goods was a landmark change made in the indirect taxes front. And this is the subject matter of the present article.

MRP-based regime

It is common for big companies to resort to outsourcing from small-scale units. One of the two reasons for patronising small units by big units was and is still economy. This may baffle the layman given the fact that big companies are supposed to reap economies of scale by producing in large quantities thus disabusing any notions of economy by outsourcing.

The truth however is when a company grows and acquires stature, its overheads starts growing exponentially. A small unit, on the other hand, is not encumbered by huge overheads and often operates on a shoestring budget. This perhaps explains the increasing popularity of outsourcing as a cost-cutting technique.

The second reason was when goods are subjected to excise duty ad valorem, it pays to procure the goods from a SSI operating on a shoestring budget because excise duty being a tax on the manufacturer, it would be advantageous to shift the excise burden to the one who would sell for a much smaller price — the base for calculating duty ad valorem.

The Finance Minister perhaps saw through this trick — outsourcing was more for evasion of excise duty. And his riposte was most appropriate — ushering in of Section 4A of the Central Excise Act that trains its guns not on the price charged by the SSI unit but on the MRP affixed under the Standards of Weights and Measures Act in respect of items notified under the new section.

This effectively put paid to the strategy of using SSI units as handmaidens in tax evasion. The huge mark up enjoyed by the marketing companies for the brands they owned that hitherto went untaxed was at last brought into the excise net.

Denial of Concessions to SSIs

The excise law now confers the small scale industry (SSI) status even to a large industry by doing away with the investment and capital norms as well as with registration requirement with the appropriate State governmental authority regulating SSI units so long as the previous year’s turnover of the wannabe SSI unit was not more than Rs 4 crore.

But it continues to be paranoid about the possible abuse of excise concessions to SSI units by well known brand owners — the exemption from excise duty is not available to those SSI units which manufacture goods bearing the brand name belonging to some other person. This, despite ushering in of Section 4A that captures value addition on account of brands into the excise net.

In the event, one is apt to wonder whether the two safeguards overlap.

It is possible to contend that what appears to be duplication is not — not all goods are notified under Section 4A for subjecting them to MRP-based excise. May be but the point is if widespread abuse of brands is detected in any industry, it would be advisedly better to shift it to the MRP-based regime that makes the job of the excise officials that much simpler whereas the burden of proof of abuse of brand is a onerous job for them.

There are spare parts and components that are manufactured by the SSI units bearing the brand names of others. If these are supplied as original equipment (OE), they get subsumed by the product of which they are components or spare parts thus giving no value addition to the large company buying these parts or components because the brand value of the items procured remain hidden inside the finished product.

And, very rightly, therefore, the excise department has agreed to give excise benefits to such SSI units to the extent they are OE suppliers. Large units by and large depend on small units either for procuring FMCG items or for procuring spare parts and components. The short point is with the Revenue’s anxieties and interest being amply taken care of, the law against granting excise concessions to SSI units that can possibly be the handmaidens of big companies is redundant.

Presumptive taxation

The MRP-based regime has accoutrements of presumptive taxation which is admittedly easier to administer and difficult to evade. The law against granting concessions to SSI units that serve the interests of big manufacturers was appropriate when Section 4A was not there.

Now that it is there, there is no need for the tedious drill of finding out whether the brand used by a SSI unit belongs to others especially if more and more excisable goods are transferred to the MRP-based regime. Indeed this is already happening. It would therefore be in fitness of things if the earlier law whose anxieties have been better taken care of by the later law is given the quietus.

What is more, the apex court has held in CCE vs Bhalla Enterprises (AIR 2005 SC 2891) that the excise regime on SSI units is designed to make life easier for them by conferring them substantial tax exemption not available to others. Let us not make life difficult for them. Any abuse of brand from the excise standpoint is amply taken care of by Section 4A. And abuse of brands from moralistic and other standpoints is taken care of by the trademark law.

(The author is a Delhi-based chartered accountant.)

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