EXCISE DUTY BLOW TO FIRMS SELLING GOODS BELOW COST
Companies selling products below manufacturing cost to enhance market
penetration will now have to pay excise duty on the normal price (
production cost plus profit). The finance ministry decision follows the
Supreme Court ( SC) ruling of last year that upheld excise demand on
sales of carmaker Fiat’s discounted
Uno brand. This could be a twin blow
for companies in sectors like automobiles, oil marketing, fast moving
consumer goods ( FMCG), consumer durables, information technology ( IT)
hardware, fertiliser & chemicals — some of those already selling
products at loss a to penetrate a fiercely competitive market. These
companies might soon get notices from the excise department. The Central
Board of Excise & Customs ( CBEC), however, is finalising
safeguards so that there is no blanket application of the SC judgment on
all companies. It will clarify that the excise duty would be levied at
discounted prices when a product is sold below cost
due to a sudden increase in raw material cost or increase in interest
rates, or under some government mandate. The Society of Indian
Automobile Manufacturers ( Siam) and some industry bodies have provided
CBEC with details of situations other than market penetration when
products are sold below cost. They have suggested the ruling should not
apply retrospectively and senior officials of a company should not be
summoned by revenue authorities. SIAM Director- General Vishnu Mathur
said the ministry had been urged to provide relief to companies that had
built up huge inventory due to difficult market conditions — as is the
case at present — and were having to sell at discounted prices. “ We
have looked into industry’s request. There will be no change in law. So,
Fiat and identical cases will not get any relief,” said a finance
ministry official, adding: “Right now, the Supreme Court judgment is
open for interpretation. We can clarify to the
field formations the scope of the judgment, so that it’s not extended
to the areas where it should not apply.” Experts said, in the absence of
a clarification, field officers might start applying the judgment to
other situations to boost the government’s revenue collections. “Show
cause notices so far are primarily being issued to auto sector
companies. But this can go to other sectors like FMCG, too,” said Saloni
Roy, senior director, Deloitte. Pratik Jain, partner, KPMG, agreed FMCG
could be the next target and cautioned amendment to the law was the
only longterm solution, as all large companies dealing with multiple
products would have a situation where a few products are sold at a loss.
At present, field officers are asking auto companies for details of
situations when goods are sold below cost. Notices have been sent to
many auto firms, seeking information on their cost structure. But the
industry is apprehensive about sharing such ‘
sensitive’ data on business strategy. In its representation to Revenue
Secretary Sumit Bose recently, the industry sought a relief from the SC
ruling. CBEC, however, has made it clear that it is not possible to do
so without an amendment to the Central Excise Act. It has ruled out
amending the law, justifying the SC ruling and, instead, suggested the
industry consider changing its processes.