Con­tract Mfg Yet to Reap Ben­e­fit of Bud­get Perk

Up­date of Cen­vat credit to al­low man­u­fac­tur­ers to trans­fer tax credit to an out­sourced unit stuck due to def­i­ni­tion is­sue

The Economic Times - - Economy - Deepshikha.Sikar­war @times­group.com

New Delhi: An am­bi­gu­ity in draft­ing has pre­vented com­pa­nies that rely on out­sourc­ing from get­ting the ben­e­fit of a key change an­nounced in this year’s bud­get. This was aimed at pro­vid­ing credit for taxes paid even if work was out­sourced. The govern­ment did not carry out com­ple­men­tary changes to the def­i­ni­tion of ‘in­put ser­vice’, which has led to some be­ing de­nied the ad­van­tage of the pro­vi­sion, a pre­cur­sor to the goods and ser­vices tax regime. A num­ber of phar­ma­ceu­ti­cal com­pa­nies, soft drink mak­ers, fast­mov­ing consumer goods com­pani- es and gar­ment mak­ers out­source all their work to work­ers or con­tract man­u­fac­tur­ers. The bud­get pro­posal was seen as a big im­pe­tus to con­tract man­u­fac­tur­ing.

In the bud­get, the govern­ment pro­posed an amend­ment in the Cen­vat (cen­tral value added tax) credit pro­vi­sions to al­low man­u­fac­tur­ers or ser­vice providers to trans­fer tax credit to an out­sourced unit, par­tially or fully. This was seen as en­cour­ag­ing out­sourc­ing as com­pa­nies can pass on ac­cu­mu­lated tax cred­its.

The pro­posal has got stuck over the def­i­ni­tion is­sue.

In­dus­try has asked the govern­ment to re­solve the mat­ter when the fi­nance bill is passed in the sec­ond half of the bud­get ses­sion that be­gins April 25.

In­ci­den­tally, com­pa­nies that rely fully on out­sourced man­u­fac­tur­ing are the ones af­fected. Those that out­source and man­u­fac­ture par­tially don’t face any is­sue.

Tax ex­perts said fur­ther stream­lin­ing of the pro­vi­sion is re­quired.

“The new pro­vi­sion to al­low trans­fer of credit to a job worker or con­tract man­u­fac­turer will re­duce the cas­cad­ing of taxes where some part of man­u­fac­tur­ing is out­sourced,” said Bipin Sapra, part­ner, EY. “How­ever, in case the en­tire man­u­fac­tur­ing is out­sourced, the cred­its on brand pro­mo­tion etc. will not be avail­able to the con­tractee.”

Sapra said a fur­ther con­ces­sion in this re­gard will fully stream­line the avail­abil­ity of credit in the case of con­tract man­u­fac­tur­ing and in­cen­tivise such ac­tiv­ity.

The govern­ment will need to tweak the def­i­ni­tion of in­put ser­vices to in­clude those that are cov­ered. A small change is needed to say those that out­source or trans­fer man­u­fac­tur­ing ac­tiv­ity are also in­cluded in the def­i­ni­tion of in­put ser­vice dis­trib­u­tor. The pil­ing up of Cen­vat credit, in lieu of tax paid on in­puts, to set off tax li­a­bil­i­ties has been a long­stand­ing is­sue for in­dus­try. The govern­ment had in this year’s bud­get tried to ad­dress the is­sue, bring­ing re­lief to in­dus­try.

Pharma, soft drink, fast­mov­ing consumer goods & gar­ment cos wait for bo­nanza

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