FinMin objects to tax-free steel supply to shipyards

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Summary* PMO had asked DEA to consider making supplies ‘deemed exports’

The finance ministry has objected to a suggestion from the Prime Minister’s Office to make steel supply to shipyards tax free.

The PMO had asked the department of economic affairs (DEA) in the finance ministry to consider making steel supplied to shipyards “deemed exports”. The proposal would benefit steel producers like Tata, SAIL and Essar which supply the nation’s shipyards. The PMO asked the finance ministry to draw up a note on the matter specifying the implications of granting the deemed export status to steel.

In July last year the steel ministry had made a similar suggestion. It went up to the level of committee of secretaries but the DEA had shot it down.

The move by the PMO is a follow up to a recommendation from the National Manufacturing Competitiveness Council. The council has suggested that supply of hot-rolled coil steel and other inputs to the shipyards that attract duties and other taxes puts them at a disadvantage. “To undo this competitive disadvantage supply of these inputs to domestic shipyards should be treated as deemed exports and be entitled to tax benefits to create a level playing field for the local shipbuilding industry vis-a-vis imports,” Council member secretary Ajay Shankar noted in a recent letter to the finance ministry.

A Committee of Secretaries in its meeting on November 16 had discussed the possibility of treating steel supply to shipyards as deemed exports and the commerce ministry had agreed to examine the viability of the same. But in the wake of firm opposition from the DEA, the status never materialised.

In response to the PMO directive to put up a note, the DEA has now prepared its reply arguing that if the demand of the steel companies are accepted then suppliers of other high value inputs like advanced machinery and navigation equipment too will be encouraged to seek similar status. “We do not feel incentivised to supply as we are denied the Cenvat credit. Currently the supply is negligible and yielding no benefits to the shipyards either,” a steel maker argued.

“The reason that fuel, cement and steel per se have been kept out of the status of deemed exports since they are in the nature of consumables and hence difficult to administer. A relaxation on this account can provoke operators in the field of fuel and cement to agitate and demand similar treatment,” the DEA said. It also cited the Directorate General

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