One of India’s biggest automobile manufacturer, Mahindra & Mahindra, announced last week that it may be looking for a substitute location which could be somewhere outside the state of Maharashtra where it will be investing a sum of approximately Rs.4,000 crore to establish its new manufacturing unit as proposed earlier. This decision is in response to the Maharashtra government’s proposed and accepted budget for last month, where it didn’t accept the proposal of automobile manufacturers’ to take back an amendment, which dictates that the VAT (value-added tax) would be left only for those vehicles that will be sold in the state of Maharashtra. In short, the amendment of 52 (A) of the Maharashtra VAT ACT stops the automobile manufacturers (car makers in particular) from claiming an input tax credit, which is high. Previously, before this amendment was done, the auto manufacturers could easily sell their finished products from the production unit to their marketing unit and then to their sales unit to claim their set-offs of VAT for sales, which they did within the state of Maharashtra.
This rigid amendment in the rules of Maharashtra VAT ACT, which was declared last year in 2011 by the state government, had met with a very negative response from the auto-producers as these manufacturers could sell only 10 percent to 15 percent of their manufactured vehicles in Maharashtra. Right now the major manufacturers in Maharashtra are Tata Motors, Mercedes, Bajaj Auto, Piaggio and Volkswagen.
The President of Mahindra & Mahindra’s automotive and farm equipment sectors, Pawan Goenka was not very vocal about their decision when the state budget was announced. All he commented was that they were ‘deciding’ on what could be the best option for them. Now it is finalized as they were expecting something good to turn up in this year’s budget, but they were greatly disappointed.
With an investment of Rs 4,000 crore already pumped up by Volkswagen in the state of Maharashtra for its manufacturing unit of its Audi, Volkswagen and Skoda brands, has made it pretty obvious that their future investments in Maharashtra would largely depend on the state’s positive step towards the VAT amendment issue. Volkswagen is in talks with other state government as well for their proposed manufacturing units in the near future. For now, Volkswagen has it manufacturing plant at Chakan, near Pune with an initial capacity of 1,10,000 units every year.Here it manufactures Vento, Rapid, Polo and Fabia. The Czech car brand, Skoda Auto also established its separate unit initially in Aurangabad, which is used by Audi, the luxury brand as well.
Piaggio India has just invested in its Baramati project, which disables it to move out anywhere from Maharashtra with immediate effect. Till now the state government of Maharashtra had many close brushes with the auto industries established in the state. This industry accounts for one of the major portions of revenue for the state.
The latest controversy erupted when Bajaj Auto threatened to take its overall operations out of Maharashtra in 2011 to set up its plant in Gujarat. This happened because the Maharashtra government denied reimbursing more than Rs 1,000 crore of its sales tax. However, the court battle went in favor of Bajaj Auto and the government had to return the money. But with this kind of anti-auto manufacturer tax policy the state will not benefit in the long run.