The Indian capital goods industry which had recorded a growth rate of 29.8 per cent in 1994-95, 17.8 per cent in 1995-96 and finally negative growth rate in 1996-97, has been dealt a body blow by a recent Supreme Court judgement. In December 1997, in Sirpur Paper Mills Vs Collector of Central Excise, the apex court delivered the judgement that machinery assembled at site will be excisable. The impact on the project cost is obvious and so is the impact on the projects coming up.Project costs will zoom and industry watchers say that it is expected that project costs will be up between 10-20 per cent. Worse still, project imports attract zero import duty and till the countervailing duty on imports of capital goods (CVD is imposed at a rate equivalent to excise duty) is imposed, Indian manufacturers will be hopelessly outpriced. Even if CVD is imposed, Indian manufacturers will be at a disadvantage as modvat can be claimed on CVD and other indirect taxes like sales tax are not applicable to imports. Salestaxes vary from state to state. Maharashtra levies sales tax at as high a rate as 13 per cent and Andhra Pradesh levies intra-state tax of 13 per cent. After the judgement, the effective rate will be much higher as sales tax is levied post-excise. Hence, even if the excise disadvantage is cushioned, higher sales tax will nullify the advantage.
The last budget had given a cushion to the industry by granting deemed export benefit to the projects (power and refinery) under international competitive bidding route. On the flip side, import duties were further lowered. For example, duty on gas turbines, generating sets, electrical transformers was reduced from 30 per cent to 20 per cent.
On the other hand, excise on boilers, gas turbines and DG sets was hiked from 10 per cent to 13 per cent. The immediate impact was cancelling of the refinery project orders to BHEL.
However, even the declining rupee and imposition of 3 per cent special import duty has not helped the industry. One of the often cited reasonsis that Indian players are not able to offer extended credit.
However, the options like build-own-operate -transfer (BooT) and its derivatives can take care of that and one of the Navratnas, BHEL, has tied up with ICICI. Another reason is the high cost of funds. However, none of this is a phenomenon of recent origin and neither is the duty reduction programme. The harsh truth that industry refuses to recognise is that despite opting for projects at a low internal rate of return (IRR), if it can't compete with imports it will never be able to be compete.
A major problem which the power plant equipment sector (PPE) players face is that globally huge capacities have been built in anticipation of demand from India and China. With demand, at least from India, not materialising, the PPE prices have crashed in the international market and this will to a great extent offset the deemed export benefits enjoyed by the indian industry.
Ficci has published a paper on the capital goods industry and the arguments init give a clear idea of the state of affairs of the industry. The paper demands that CVD be levied for sales tax as well. It also points out that octroi on material results in a disadvantage to the industry.
On the other hand it also argues that consumables (tools) attract a duty of 67 per cent (40 per cent basic + 18 per cent CVD + merit duty 2 per cent).
Consumables form 5 per cent of total cost. The paper argues that this disadvantage is not faced by imported capital goods. The argument is clear.
Allow the import of tools at lower duties but don't lower duties on capital goods. However, the argument that local levies should at least be at par with import duties can hardly be questioned.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
