In order to give a boost to the bleeding manufacturing sector, the Government has slashed Excise and Custom duty rates for goods valued at ad valorem rates by 4% to 10%, 8% and 4% from the existing 14%, 12% and 8%.
Cars, other than small cars, attract composite rates - that are a combination of specific and ad valorem rates. The rates applicable hitherto were '24% + Rs.15,000/-` per unit for cars of engine capacity 1500 cc to 1999 cc and '24% + Rs.20,000/-` per unit for cars of engine capacity of 2000 cc or more. The ad valorem component of these rates has been reduced from 24% to 20%.
Though the duty rate has been reduced, an immediate reduction in prices of cars may not be in the pipeline for most of the car manufacturers. This is due to the fact that most of the car manufacturers have to recoup the already incurred losses due to the recession and indigeneous market slump in the consumer market segment.
From the taxation aspect, though the Government has reduced the duty rates, it has not reduced the Service tax rate which is still maintained at 12.36%. This has created an inverted duty structure where a manufacturer takes 12.36% as Service tax credit on input services but his output goods is taxable at 10% (or even at lower rates of 8% and 4% respectively). This implies that 2.36% is a cost to the manufacturer which is not available for set-off and significant accumulation of Cenvat credit balances. This would primarily affect manufacturers whose processes involve significant consumption of services from third parties.
It is high time that the government synchronizes the amendments with all related legislations and reduce hardship for the taxpayers.
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