MAT noose likely to be tightened
Textile industry split on excise exemptions
Drug firms prescribe duty cut pill for FM
Tariff fortress separates foreign, local liquor firms
Car caravan trundles overseas

New Delhi, Feb. 24: 
This year’s budget is likely to hit the so-called zero profit firms harder with North Block mandarins planning to change norms for calculating minimum alternative tax (MAT). The finance ministry also plans to abolish the 10 per cent distribution tax on corporate dividend payouts, currently in vogue.

At the same time, it wants to lower the tax on foreign companies, which stands at 48 per cent, to the level of domestic companies that are taxed at about 38.5 per cent at the top bracket.

Effective corporate tax rate may also be lowered by removing the surcharge while retaining the peak rate at 35 per cent. The government has decided to get tough with firms which are obviously doing well but, through clever book-keeping, show a zero net profit. MAT is a tax imposed on these profit-making companies, which use various tax-shelter schemes to avoid paying normal corporate taxes.

The MAT tax under the new rules is to be hiked to an aggregate of 0.75 per cent of the company’s net-worth, plus 10 per cent of the dividend being paid out. At present, MAT is computed at 7.5 per cent of the company’s book profit or commercial profits.

The companies that have been paying just MAT instead of the normal corporate tax include several big names including Reliance Industries. And they had been fighting hard against this measure. Apex chambers — CII and Ficci — have in fact petitioned against the retention of MAT.

Ficci has demanded that even if MAT is retained, it should allow companies which have paid them to claim discounts in later years, when they pay full corporate taxes.

Officials said that even the provision of imposing MAT on the basis of book profits is being manipulated by changes in accounting practices, and by under-reporting incomes. They point out that whereas the current regime is able to get companies that declare zero net profits to pay up just 20-24 per cent of its profit before tax (PBT) through MAT, the new system of calculating MAT will yield about 30 per cent of their PBT as tax even, if they declare zero dividend.

Consequently, the finance ministry has decided that the basis of MAT should not be on the basis of reported commercial profits, but rather on the real ability to earn. Officials said that net worth will be calculated at the value of capital employed by the company, and will not include its savings as, otherwise, this would mean a dis-incentive to corporate savings and investment.

Officials said the reason why they would like the MAT to combine a tax on dividend is because many companies would otherwise simply transfer their current profits into savings to be given out as dividend in a later year.

Among methods being used by corporate houses to avoid paying normal corporate taxes is the misuse of provisions for depreciation. Excessive depreciation, officials feel, has led to over-capitalisation of companies and encourage mergers and amalgamations meant solely to help companies save on taxes.

The finance ministry also plans to abolish the 10 per cent distribution tax on corporate dividend payouts. The reason is that this tax amounts to double taxation as individual incomes are in any case being taxed.

At the same time, most companies are holding back dividend and retaining this in untaxable form or the other, thus leaving the exchequer poorer. As the dividend tax is being scrapped, the government also wants the tax on foreign companies reduced to the level of domestic companies. Currently, foreign companies are taxed at the rate of 48 per cent while Indian companies pay 38.5 per cent. The reason for the higher taxes paid by foreign companies was that they were not paying dividend tax.


Mumbai, Feb. 24: 
As the countdown to the budget begins, the textile industry, which is waging a battle for survival, finds itself sharply divided on whether a few segments should continue to be exempted from excise. Even the remote chance of finance minister Yashwant Sinha bringing hitherto untaxed segments into the excise fold has made this budget one of the most keenly watched, as far as textile makers are concerned.

Few believe Sinha will have the political courage to levy excise duties on sections like grey fabrics, knitted garments, hank yarn (used predominantly by the handloom sector) and independent processors, given that most of these are reserved for the small-scale sector.

However, there is a small section which feels he may actually take such an unpopular decision, going by his decision to impose a steep 16 per cent duty on readymade garments last year. It is believed that the finance minister may levy a duty of 8 per cent on some segments that have so far remained outside the excise net.

Though the actual scenario will be clear only at the end of the month, the industry is witnessing a confrontation over the issue of whether the excise duty protection granted to some segments should continue.

The first salvo was, perhaps, fired by the organised mill sector, which called for such exemptions and concessions to be removed. Their argument, much to the chagrin of other segments, is that the sops encourage evasion. “Even a matchbox has an excise duty component in it. Then, why should not these sectors pay excise duties,” an industry representative said.

The representative claimed that the existence of such exemptions only went on to distort the VAT chain, through which manufacturers can avail of Cenvat credit. This is a mechanism through which industrial consumers of a particular raw material or a product can claim credit to the extent of excise duties paid by the manufacturer of the raw material.

For example, while a processed fabric manufacturer has to pay excise duties to the tune of 16 per cent, the grey fabric that he sources has nil excise duty imposed on it. This, they say, leads to a situation where the processed fabric manufacturer is unable to claim Cenvat credit. “Therefore excise duties should be imposed at every successive stage so that the VAT chain is not broken,” sources added.


New Delhi, Feb. 24: 
The Rs 25,000-crore pharmaceutical industry has sought rationalisation of import duties on raw materials and drug intermediates, bulk drugs and formulations as part of its pre-budget prescription handed to the finance ministry.

The Organisation of Pharmaceutical Producers of India (OPPI) has suggested that duty on raw materials, drug intermediates and bulk drugs be reduced to 15 per cent and that on formulations be reduced from 35 per cent to 25 per cent.

P. S. Khanna, resident director, OPPI, said the present import duty rate, which comes to 41.3 per cent (basic duty, plus SAD), is extremely high for medicines, which happen to be essential commodities.

OPPI also wants clinical trial samples of new drugs to be exempted from the 35 per cent duty they attract at present, on the ground that these drugs have no commercial value as they are not sold. Research-based companies want all R&D expenses to be available for weighted deduction.

Speaking about his expectations from the budget, Bimal Raizada, senior vice-president, Ranbaxy, said: “We expect all expenses on research, including regulatory expenses, clinical trials and patent filing, maintenance and litigation expenses world-wide to be considered as R&D expenses, available for weighted deductions.” He also advocated a 10-year tax holiday on income received from R&D technology, if re-invested in R&D for creation of future ‘intellectual property’ wealth.

OPPI, which has about 68 member firms that includes all the pharma MNCs in the country and leading Indian companies like Ranbaxy, Torrent, Wockhardt and Dabur to name a few, also wants penalties on transfer pricing adjustments to be toned down.

A penalty of 100-300 per cent is levied, which, OPPI points out, varies from 0-20 per cent world-wide. Further, a 5 per cent range is now allowed for the derived arms in transfer pricing, which it wants to be 25 per cent for original research molecule.

Though the Indian Pharmaceutical Alliance (IPA) has not issued any pre-budget memorandum, secretary-general D.G. Shah said, “Our demands are already listed in last year’s post-budget memorandum.” IPA is an association of 12 large research-based national pharmaceutical firms that includes the likes of Ranbaxy and Dr Reddy’s Labs.


New Delhi, Feb. 24: 
A heavy duty lobbying war has broken out between the domestic and foreign liquor manufacturers over taxes on imported bottled liquor — which may well affect the price of Indians’ favourite tipple.

Foreign whisky, wine and other spirit makers want the government to rationalise the impact of its central and state duty structure so that the whopping 700 per cent levies on foreign bottled liquor is scaled back to reasonable levels.

The domestic manufacturers who import foreign whisky and other liquor in barrels to blend with their local produce want a heavy differential between the two kinds of imports.

The high pressure lobbying by foreign liquor manufacturers saw even British prime minister Tony Blair take up the cause of the Scotch whisky makers with Prime Minister Atal Bihari Vajpayee. Sources said Vajpayee had promised Blair a positive result.

The EU commission as well as several western governments have also made it clear to India that its taxation structure, if continued, could force their spirit and wine makers to approach the WTO for redressal.

WTO rules, they point out, in any case will force India to bring down its effective tariff protection against foreign liquor to 150 per cent within three years. They have pointed out that India’s customs duty alone on these spirits and wines is a high of 210 per cent plus a 4 per cent special additional duty, besides states levy their own duties on liquor imported in bottles.

”There is a strong likelihood of a change, the customs duty is expected to drop this year on imported spirits and wines,” sources said. Top foreign liquor makers are waiting in the wings to pounce on the upper end of the 80 million case IMFL (India made foreign liquor) market.

Besides United Distillers which wants to bring in Johnnie Walker here and Segrams’ which wants Chivas Regal, Cutty Sark International which is yet to set up operations here too wants an entry with its sole brand — Cutty Sark. French wine makers Moet & Chandon, Australian McPhersson, Galle Wines from California too are keen to get into the Indian market.


New Delhi, Feb. 24: 
The Indica is going to hit the roads in Britain; Hyundai Motor’s Indian arm plans to sell its cars in Europe; Ford India is eyeing markets in South America.

If you think the go-go plans of carmakers in India are just so many pipe-dreams, wait till you hear what the government’s talking about. Its medium-term export strategy speaks of storming the two biggest automobile bastions — the US and Japan, with Europe thrown in for good measure.

Carmakers in India aren’t quailing at the prospect — they reckon that with a little help from the government in the form of fiscal and associated incentives, they could well drive their way up that mountain.

“We are in preliminary talks with MG Rover to evaluate export opportunities for the Indica,” says a spokesperson for Telco, which makes the 1400 cc Indica that has carved out a 22.1 per cent market share in the competitive eight-model premium hatchback market.

“Telco aims to export 12,000 Indicas every year to the UK for sale through the 250-plus dealerships of MG Rover, a unit of German luxury car maker BMW. Shipments could begin by mid-2003 if an agreement is reached,” the spokesman said.

Telco’s car division has lost money hand over fist since the company started producing the small car in 1999. But this year has been a great one for the company, which hopes to sell about 60,000 Indicas in the year to March, a 37 per cent increase over last year.

Indica sales have been rising steadily and by August it had displaced Hyundai’s Santro from the pole position in the B segment before the Santro nosed ahead in November.

The foray in UK will open another beachhead in Europe. At present, the company already exports cars to the European Union, Malta, and Latin American countries like Ecuador.

Telco has already developed a diesel engine that meets Euro III tail-pipe emission standards, but has yet to develop a petrol engine version that meets the specifications, the company spokesman said. It hopes to break-even by April on the strength of strong car and truck sales this year.

Says Telco’s exports chief A. S. Rangan: “We would like to grow at the rate of 15-20 per cent a year in the steady markets. We fully agree with the government’s new medium-term export policy. While Europe offers a great potential, Japan with its high restrictions will be a difficult terrain. Indian companies can look towards US only at the right time.”

Arch-rival Hyundai Motors India is equally gung-ho over export prospects. “We will develop specific compact models to export to continental Europe,” says B.V.R. Subbu, Hyundai Motor India’s chief of marketing.

Subbu reckons government policies can help car makers target niche markets in Europe and America. “We are at present exporting to Algeria, Morocco, Indonesia and South Asian countries. As a part of global strategy, we want to expand our reach from India,” he added. Hyundai exported around 4,500 cars this fiscal from India and feels that, given the right atmosphere, exports can double.

Sources at Ford India, the country’s biggest car exporter, said: “We are currently exporting to South Africa and Mexico. We are exploring possibilities in South America and Asean countries. If the policies become exporter-friendly, we will have no problems in creating a niche market in developed countries.”

“With a change in labour policies and the proposed low rate of duty on power, India can attain its aim of grabbing a 1 per cent share of total global trade. We have already started the process of import substitution by signing an agreement with Hindustan Motors which will make engines for our Ikon cars at their Pitampur plant in Madhya Pradesh. If we start investing further in technologies in India, the country could become an export hub for cars,” sources said.


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