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PRE BUDGET MEMORANDUM 2009-10
Preamble:
The current Indian Forging scenario:
Auto industry in India plays an important role in development of the Indian economy, in terms of creation of employment, foreign investments, R & D, ancillary development, exports, technology, revenue to the Government, etc. Forging industry forms an integral part of the auto sector.
Owing to the global economic slowdown, the Indian Forging industry is struggling to survive for want of demand in the Indian and export markets. Apart from slack in demand, it is also suffering due to escalating cost of inputs (like steel, power, furnace oil, LDO, gas, labour, etc.), stretched payment terms, deficit in working capital; rigorous labour laws, pressure from OEMs for reduced prices, easy availability of imported cheap forged parts; and the entailing negative growth.
The logical effect of these instances is witnessed in terms of lay offs, lock outs, block closures, unit closures, loss of jobs, declining competitiveness of the forging industry and diminishing revenue to the Government.
The steps taken by the industry towards cost cutting are in vein in the absence of active support from the State & Central Governments. Results of our efforts, from time to time, to draw the Central and State Governments’ attention to these difficulties are yet to be seen.
Possible solutions through the forthcoming Union Budget proposals :
In an attempt to combat the pathetic situation of the Indian Forging industry, the following specific issues need to be addressed on a war footing basis :
1. Simplification of Direct Taxes :
Proposal : Simplify and rationalize the tax code to a minimal system eliminating numerous exemptions, bring down the tax rates and maintaining revenue neutrality. Provide relief for salaried tax payers at the lower end of the tax plan.
2. Abolish FBT :
Proposal : Eliminate FBT
Benefits for 1 and 2 : Simpler tax administration and lesser transaction costs for tax payers.
3. TDS credits :
Proposal : Simplify current system for giving electronic credit for TDS
Reason : Recent changes have made it very complicated to file TDS returns.
Benefit : Easier tax administration and lesser transaction cost for tax payers.
4. Boost investment :
Proposal : Accelerated depreciation as in the case of commercial vehicles and reintroduction of investment allowance in other cases.
Reason : Kick start sluggish economy particularly automotive and commercial vehicle segments. Also boost investments.
Benefit : Faster recovery from recession.
5. Excise :
5.1. Restoration of CENVAT credit for LDO In the Union Budget 2002-03, LDO was excluded from the scope of inputs attracting CENVAT credit.
Proposal : It is requested that LDO may be allowed as eligible input for the purpose of availing CENVAT credit; and suitable instructions may be issued.
Benefit: Improvement in competitiveness of the Indian Forging Industry & increased exports, elimination of double taxation.
5.2. Delay in excise refunds
Rebate application travels from Divisional Office to Range for verification of documents, back to divisional office, sent to Audit Section and back to divisional office, for issuing refund cheques. This causes delay
Proposal 1: Post audit limit of Rs.5 lakhs to be extended to Rs.50 lakhs.
Proposal 2: Verification can be completed at Range itself and the current system of review by audit again to be discontinued or this can be done separately without waiting for the release of refund to the assessee.
Proposal 3: Excise refund/rebate applications to be accepted once in a month.
Reason : Currently such applications can be made only once in 3 months.
Benefit : Quick settlement of refunds.
5.3. Cenvat on structural steel :
Proposal : Cenvat may be allowed for use of structural steels falling under Chapter 73 on construction, fabrication materials.
Benefit : Boost to the manufacturing companies for expanding their capacities.
5.4. Interest demand on differential duty paid on supplementary invoice with retrospective
date: At occasions, price revisions are given after supplies are effected, when supplementary invoice would be raised involving duty to be paid. Department is demanding interest on differential duty with retrospective date.
Proposal : Interest should not be demanded for the difference in duty since the same is beyond the scope of the supplier.
Benefit : Clarity in tax implementation.
6. Service Tax on input services – Wind Mills :
Windmills enjoy exemption of Excise Duty; and are eligible for CENVAT credit. However, they are deprived of CENVAT credit on Service Tax applicable to their installation and commissioning. The stipulation that they should be installed in the factory premises, has resulted into an anomaly in the rules governing CENVAT credit on taxable services. It may be understood that windmills are run by the wind velocity, which is absent in the factory premises. As such, they are normally installed on hill tops, where ample wind velocity is available. Clean, alternate and cost-effective electricity is a crucial input to any industry, may it be manufacturing or otherwise. Many industrial units have, therefore, invested heavily on making it available for captive use, through windmills. By various means, the Government is also encouraging such efforts However, in contradiction with these efforts, Excise authorities are denying CENVAT credit on Service Tax, as the windmills are not in the factory premises.
Proposal : In an attempt to support the Indian industry and the economy, in combating the current downtrend, it is requested to immediately issue necessary amendments to the Service Tax Rules, with retrospective effect.
Benefit : This will enable the investors to recover their investment cost.
7. Green Power :
Proposal : Exempt income from renewable sources of power such as wind, solar, etc., from income tax.
Benefit : Boost green power and fight global warming
8. Exim related issues - Steel & Forgings :
8.1. Abolishment of / reduction in import Duty on steel : Currently, steel imports attract 5% duty. It is essential to encourage the conversion industry by import of steel with marginal or no import duty and export of end products.
Proposal : It is earnestly requested to abolish import duty on steel;
Benefit : This would enable the industry to source its raw material requirements at globally competitive prices, and hence ensure global competitiveness of the industry.
8.2. Imposition of ban / heavy export duty on export of steel: Steel forms a major part of inputs of the forging industry. Current domestic steel prices are around USD 720 per ton Ex Works, i.e. about USD 100 more than the international steel prices. Total steel exports are to the tune of around 5 million tons a year. To compensate margins sacrificed in the global markets due to stiff competition, the Indian steel producers frequently raise domestic steel prices and recover them at the cost of domestic steel consumers.
Proposal : It is requested to ban export of steel or restrict steel exports to a limited percentage of production and restore & enhance export duty on iron ore, that had been withdrawn earlier, from 15 to 20%.
Benefit : Availability of steel for domestic use at a reasonable rate and stable steel prices is assured, export of components and aggregates is encouraged rather than raw material, with higher value addition and higher level of employment.
8.3. Export Rebate on forged parts : To earn maximum foreign exchange for strengthening Indian economy, exports need to be promoted.
Proposal : It is requested to enhance DEPB Rate (%) cap to 20% on such value added products.
Benefit: It would enable the Indian Industry to compete with its counterparts from China globally, who enjoy a similar benefit from their government.
8.4. Imposition of ban / heavy import duty on import of forged parts : Import of forged auto components and aggregates of inferior quality, including safety critical items, from countries like China and Thailand, is consistently on a rise. The domestic industry has suffered material injury due to this. The sales volumes of the domestic forging industry have declined because of dumping. These imports are worrisome as they are unidirectional. In the last financial year, imports increased by 31% while the domestic industry has faced a negative growth of 35%.
Proposal : A safeguard duty, as well as an antidumping duty of at least 30% should be levied on imports of forgings as well as aggregates with forged parts on imports from China.
Benefit : Protection of the clambering forging industry, improved reliability of auto components.
8.5. Reimbursement of indirect levies to exporters: Currently, there are various Government schemes for exporters, who import some contents for export of their
products. These include compensation towards customs and excise duties on imports. However, there are various other indirect taxes, cesses, duties, octroi, surcharges, etc, levied by local bodies, State & Central Governments. So as to promote exports, and enable Indian exporters to be more competitive in the global markets, there is a dire necessity to introduce a scheme, which will allow the exporters to exercise their legitimate right to claim reimbursement of all indirect taxes paid to produce and export goods.
Proposal : It is requested to extend the scope of Duty Drawback Scheme to cover reimbursement of all indirect taxes paid by exporters.
Benefit : Increased competitiveness of exporters in global market, improved exports.
9. Concessions and Incentives towards technology upgradation & automation : The need of the hour is to upgrade the technology, so as to have competitive edge and achieve international standards. In keeping with the Indian Government’s conscious efforts towards incremental globalization, it will be prudent for an Indian enterprise to keep abreast with the global technological advancements and be competitive in the global market. Since 1999, the Indian Textile industry has witnessed the benefits in terms of quality enhancement, improved productivity, competitiveness, cost-effectiveness, etc, due to modernization in plant and machinery, enabled through the Technology Upgradation Fund (TUF) scheme funded by the Government. Also, recently, the Government has agreed to grant Rs 600 crores towards interest subsidy as initial fund for TUF Scheme for automation in the Indian Paper and Paper Board industry.
Proposal 1: In line with the TUF Schemes for the Jute & Textile, as well as Paper & Paper Board industries, it is earnestly requested to introduce one such scheme for the Indian Forging industry also.
Benefit : Modernisation in plant & machinery for overall improvements in quality, productivity, competitiveness and reduced costs.
Proposal 2: Please allow a part of the proposed TUF Scheme for the forging
industry, to promote research and innovations in the forging processes, equipment, etc, undertaken at various engineering colleges, polytechnics and ITIs.
Benefit : Encouragement to technological research & development activities in forgings.
10. The Indian forging industry predominantly consists of Micro, Small and Medium Enterprises (MSMEs). Particularly micro and small enterprises have the plant and machinery of the ‘50s and / or ‘60s forging genre. They also have limited capex potetial. They, thus, have marginal or no ability to import the latest and brand new capital goods such as furnaces, hydraulic & pneumatic forging hammers, presses, forging charging & discharging machines, manipulators, etc. As such, even if they import capital equipments of the ‘80s or ‘90’s, they would have upgraded their technology by 20 plus years. The current guidelines for import of second hand capital goods, as issued by DGFT, are based on the age of a second hand machine.
Proposal : It is suggested to base the guidelines on residual life of a capital item and also to allow import of capital items for the forging industry on the basis of 10 years residual life as certified by a chartered engineer from the country of export, against self-certification, through the ‘Green Channel’ route.
Benefit : The micro and small forging units will also be able to upgrade their technology and will improve on quality, productivity, competitiveness and reduced costs.
11. Reforms in HR policies & Labour Laws :
As mentioned in the Preamble above, the Indian forging industry is paralyzed in the current global economic slowdown, for want of orders, increased input costs, soaring labour costs, payment defaults, shortage of working capital; stringent labour laws, OEMs’ pressure on rate reduction, as well as their inclination towards cheap imported forged parts; and the concomitant negative growth. In absence of sufficient orders, most of the forging units are forced to run in a single shift, with part capacity utilization. Although the direct labour remains idle, it cannot be rendered surplus due to the stringent Indian labour laws; but has to be maintained without any output. This amounts to pressure on working capital, where banks / financial institutions are not coming forward with liberal terms for loans. It is requested to bring reforms in HR policies of the Government by allowing the forging units to –
Proposal 1 : lay off such surplus labour for a period of 10 days a month with 50% salary; and for a period exceeding 10 days in a month with 70% of salary.
Proposal 2 : terminate the services of redundant work force (depending on the order book of an individual unit and the prevailing market conditions) which will be taken on the roles of the unit subsequent to 01 July 2009, based on the actual requirement of labour.
Proposal 3 : replace 5% of the permanent labour work force on an annual basis, in an effort to maintain productivity and improved production levels
Benefit : Prevention of labour exploitation, elimination of reasons for temporary employment, infusion of fresh blood while maintaining the employment rate.
12. Re-classification of MSME :
As per the Micro, Small & Medium Enterprises Development Act 2006, the enterprises are classified as under (with reference to manufacturing enterprises):
| Type |
Ceiling on investment in Plant & Machinery |
| Micro |
Rs 25 Lakhs |
| Small |
Rs 5 Crores |
| Medium |
Rs 10 Crores |
For the reasons mentioned below, it is proposed to issue necessary amendments in the forthcoming budget proposals, as under:
Reasons:
Over a period of time, technological advances have undergone a sea change Costs of equipment have gone up remarkably; Quantum of investment required has also increased substantially
Proposal : It is requested to re-classify the forging MSMEs as under :
| Type |
Ceiling on investment in Plant & Machinery |
| Micro |
Rs 1 Crore |
| Small |
Rs 10 Crores |
| Medium |
Rs 35 Crores |
13. Fuel prices – Government intervention for transparency to curb profiteering :
Fuel (like furnace oil, LDO, gas, etc) is yet another major input of the forging industry. Pricing of fuel needs to be governed by a transparent policy. During the passage of fall in international crude prices, the Indian oil companies have refrained from passing on the benefit to the industrial consumer, but have rampantly embarked upon profiteering. This calls for intervention by the Government for the desired transparency in their pricing policy face-to-face with international crude prices. Particularly in a conversion industry like Forging, fuel cost has a direct impingement on its competitiveness.
Proposal : It is requested to have a check on and regulate industrial fuel prices by fixing a percentage of a reasonable profit margin.
Benefit : This will facilitate the industrial fuel consumers to establish their systematic and stable pricing structure.
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