Car spares suffer in non-VAT states

With key states like Tamil Nadu, Uttar Pradesh, Gujarat, Madhya Pradesh and Rajasthan opting out of the VAT regime, automobile component manufacturers in these states are finding themselves at a disadvantage viz-a-viz their counterparts in VAT-compliant states.

When these manufacturers ship their produce to states that have implemented VAT, they cannot claim a refund of the four per cent interstate sales tax or CST.

The Crisis Over VAT: Complete Coverage

In contrast, manufacturers from a VAT state get the full CST refund when they sell in other VAT states as there is an unbroken VAT chain. This leaves them with a four per cent price advantage as compared to producers in non-VAT states.

Hi Tech Gears, for example, has its mother plant at Bhiwadi in Rajastan -- a state that has not implemented VAT.

An estimated 70-75 per cent of this plant's order comes from Hero Honda, which has its plant in Gurgaon in Haryana, which was the first to join the VAT bandwagon last year.

The four per cent CST paid by Hero Honda for interstate purchase cannot be claimed as credit during the value addition.

This makes supplies from Hi-Tech less competitive on the price front. 'Four per cent is not a small sum for a component company. In some cases, this could be the profit margin,' said a company official.

A similar problem is being faced by the Ashok Minda Group. A group company, Minda Huf, has plants in Pune in Maharashtra and Noida in Uttar Pradesh.

The company's customers now prefer buying from the Pune plant, so that CST can be claimed as credit. Deepak Singhal, head of strategic planning, Ashok Minda Group, said, "A part of this problem could be solved by taking work-in-progress in the Noida unit and finishing it in Pune."

Industry experts predict investment could migrate to VAT states if the existing situation continues for long.

"The continuation of this disparity will alter the supply chain. Particularly in the low-technology items, shifting of component purchase to VAT states would not be too difficult for the automobile companies," Automotive Component Manufacturers' Association's executive director Vishnu Mathur said, adding that in high technology components, this may take a while to happen.

Members of ACMA in Rajasthan have already made representations to the state government. "We are aware that this is not a state government driven decision. But then the government had to be sensitised on this issue which may drive business out of the state," said an industry source.

The industry believes that non-VAT states will have to fall in line and implement VAT sooner or later. Said Anand Group vice-president (strategy & business development) Anil Srivastava: "The supply chain obviously gets broken due to the non-implementation of VAT in some states. But having said that we are also confident that rest of the states will have to fall in line."