Financial Daily from THE HINDU group of publications
Sunday, Jun 20, 2004
Financial Daily from THE HINDU group of publications Sunday, Jun 20, 2004 |
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Industrial Policy Industry & Economy - Budget It may now pay to spread units — Excise, fiscal sops likely for `disaggregation' of production
K.R. Srivats
New Delhi , June 19 THE 2004-05 Union Budget is likely to announce excise and other fiscal sops for companies to `disaggregate' production with a view to spreading their manufacturing activity across multiple locations. This is as against the present model where companies organise their entire production operations under a single roof. According to Finance Ministry sources, there were many industries where technology and communications had advanced sufficiently to make it feasible for companies to exploit `economies of scope' by undertaking production in different locations. In areas like manufacture of soaps or even automobiles, it has been conclusively established that the economies of scale derived from production under a single roof were not an over-riding factor, unlike say for steel and cement. "We want companies to disaggregate their production wherever technology and communication permits. This would enable more industries to come up in rural and semi-urban centres, instead of manufacturing activity being concentrated in a few enclaves," the sources said, adding that this will also help create employment opportunities in the hinterland, which is a key focus area for the ruling United Progressive Alliance (UPA). The Budget may accordingly see a slew of measures that would make it easier for companies to move components and materials from one unit to another, which will, in turn, provide an incentive for disaggregation of production. "Currently, companies are required to maintain extensive excise documentation and procedures for inter-unit transfers, which means they prefer to concentrate all manufacturing processes within an existing factory. We could look at ways to make clearances from unit to unit a less cumbersome exercise," the sources said. Companies also do not find it gainful to spread out their production operations across multiple locations because as per the prevailing law, excise duty on products is now attracted on manufacture. This means the liability of paying excise falls on the unit concerned as soon as the product is manufactured. If the objective is to facilitate disaggregation and allow free movement of components across factories, this could be done by levying excise at the first point of independent sale rather than at the point of manufacture. "We can even explore a change in the present excise law in order to facilitate disaggregation of production by companies," the sources said. They noted that while companies were already using the outsourcing route for procuring components or for undertaking particular manufacturing jobs in the production chain, this mainly involved engaging outside parties and vendors. "There is no reason why larger companies, apart from taking the vendor route, cannot also look at disaggregating production through setting up their own units, which need not necessarily be under the same roof," the sources added.
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