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The Supreme Court had ruled last year that Fiat India will have to pay excise duty on the basis of cost of production plus a notional mark-up, rather than on the selling price, which was lower than the production cost. Photo: Bloomberg
The Supreme Court had ruled last year that Fiat India will have to pay excise duty on the basis of cost of production plus a notional mark-up, rather than on the selling price, which was lower than the production cost. Photo: Bloomberg

India to issue circular on excise duty soon

Circular may end months of uncertainty for the auto industry following Supreme Court's decision in the Fiat India case

New Delhi: In a move that may end months of uncertainty for industry following the Supreme Court’s decision in the Fiat India case, the finance ministry on Tuesday said the government would issue a circular by next month specifying how excise duty will be levied on goods that are sold below their cost of production.

The court had ruled last year that Fiat India will have to pay excise duty on the basis of cost of production plus a notional mark-up, rather than on the selling price, which was lower than the production cost. This ruling affected many auto makers and fast-moving consumer goods producers and other manufacturers, who often sell goods below their cost price to capture market share or prune inventories— especially in a slowing market. In the 11 months ended November, passenger vehicle sales have fallen 7.4% in India as compared to the same period last year.

In the absence of clear rules, the tax department, looking at ways to raise tax revenues and narrow the fiscal deficit started scrutinizing past sales. Following concerns expressed by the industry in mid-2013, after the Union budget was presented on 28 February, the government promised to set up a committee in a month but that did not materialize.

It is still not clear whether manufacturers will get any relief from the proposed circular.

“The tax department has been writing to companies and asking if they have been selling goods below market price and nudging them to furnish details of the same," said Harishanker Subramaniam, partner and national leader, indirect taxes, at audit and consulting firm EY. “The circular that comes out may explain in which cases the Fiat judgement will be applicable," he said.

In a statement, the finance ministry said the modality of implementation of the decision of Supreme Court is under consideration of a committee of chief commissioners and a circular in this regard will be issued by 15 January.

This decision was taken following the suggestions by a forum headed by Parthasarathi Shome, adviser to the finance minister, that was set up in July to exchange views between industry groups and government for tax issues.

Vishnu Mathur, director general of Society of Indian Automobile Manufacturers, declined comment stating that nothing has been communicated to the auto lobby.

The government will also ensure that the pending service tax refunds for export of services are made available to the taxpayer.

“It is a good move on part of the government to push through rebates and refunds. The delay in refunds of service tax has been one of the major issues faced by the industry," said Subramaniam.

The finance ministry will also address the problem of service tax on reinsurance agents, distribution of Cenvat (central value added tax) credit to input service distributors to any unit of the entity so long as the unit to which the credit is getting distributed is manufacturing dutiable goods or providing taxable output services.

Amrit Raj contributed to this story.

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