The Congress-Nationalist Congress Party (NCP) government in Maharashtra, scheduled to go for Assembly elections later this year, has created a special category of 'ultra mega projects' with investments of more than Rs 1,500 crore. These projects will be able to make VAT set-off claims on the basis of gross sales, and not net sales.
To avail of the benefits, top automobile companies - Tata Motors, Mahindra & Mahindra, Volkswagen and Bajaj Auto - have announced investments totalling Rs 11,510 crore in the state. These companies had threatened to leave Maharashtra and invest in other states when the state government had brought amendments to the Maharashtra VAT Act with effect from April 1, 2011, and made net sales the basis for VAT set-off claims.
While Mahindra & Mahindra will make new investments of Rs 4,000 crore to add new capacity at its Chakan unit, Tata Motors will invest a similar amount in the state. The company had in 2012 initiated a Rs 4,000-crore investment that was to go on till 2017. Tata Motors' new investment is earmarked for product development and plant upgrade, and not for capacity expansion.
Mahindra & Mahindra Chairman & Managing Director Anand Mahindra said production at his company's Chakan plant would be increased in two phases. In the first, production will be raised to 450,000 units a year (from the current 320,000 units) and the first products will be rolled out from 2016. In the second, production will be further increased to 750,000 units a year.
The company's additional investment will take its total in the Chakan plant, which produces utility vehicles, pick-ups and commercial vehicles, to Rs 8,000 crore. The facility is likely to generate 2,000 more jobs.
Two-wheeler major Bajaj Auto will make fresh investments of Rs 2,000 crore at its Aurangabad plant in two phases. The plant's capacity will eventually be increased to 3.84 million units a year from 2.28 million units at present. This plant manufactures two-wheelers and commercial vehicles. German auto giant Volkswagen will invest Rs 1,510 crore in its Chakan plant. The company intends to roll out new products with this new investment.
These four companies signed a memorandum of understanding (MoU) with the government on Thursday. Maharashtra Industrial Development Corporation (MIDC) Chief Executive Bhushan Gagrani told Business Standard: "The investor under the ultra mega project in the automobile and non-automobile sectors with investments of more than Rs 1,500 crore are now entitled to make VAT set-off claims on gross sales basis. However, there is a rider that the VAT set-off claims will not exceed 12.5 per cent of the total eligible VAT refund in a year." According to Gagrani, ultra mega project category is in addition to the existing mega project category, which covers projects with investment of over Rs 500 crore.
"These companies were in constant dialogue with the state government and MIDC for over two years. They did not rush to implement investment plan outside but ultimately decided to invest in Maharashtra after the ultra mega project category, with VAT set-off claim on gross sales basis, was brought," Gagrani said.
He added M&M had indicated moving out its investment plan to Madhya Pradesh, while Bajaj Auto had said it would shift to North India, following amendments to the Maharashtra VAT Act.
A senior government official, who did not wish to be named, recalled that the 52 (A) amendment to the Maharashtra VAT Act had prevented companies from claiming higher input tax credit (ITC). "Earlier, auto makers would formally sell their entire production from the manufacturing arm to the marketing and sales arms to claim VAT set-off for sales within Maharashtra. The marketing arm would then, in effect, bill this to other states across the country. However, under a revised rule, the companies were unable to claim the VAT set-off on products sold outside the state."
Both Chief Minister Prithviraj Chavan and Deputy Chief Minister Ajit Pawar were opposed to reversal of the amended VAT set-off scheme, as the state had to bear an annual burden of at least Rs 7,000 crore.
A senior minister agreed the government and industry were unable to arrive at a consensus in this regard. Also, the state industries department and Ernst & Young looked into the issue but failed to come out with a solution agreeable to the automobile industry. Besides, the state's new industrial and investment policy, announced in January last year, did not give the much-needed relief to the industry in the amended VAT set-off scheme.