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Contract Mfg Yet to Reap Benefit of Budget Perk

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Update of Cenvat credit to allow manufacturers to transfer tax credit to an outsourced unit stuck due to definition issue
An ambiguity in drafting has prevented companies that rely on outsourcing from getting the benefit of a key change announced in this year's budget. This was aimed at providing credit for taxes paid even if work was outsourced. The government did not carry out complementary changes to the definition of `input service', which has led to some being denied the advantage of the provision, a precursor to the goods and services tax regime.
A number of pharmaceutical companies, soft drink makers, fastmoving consumer goods compani es and garment makers outsource all their work to workers or contract manufacturers. The budget proposal was seen as a big impetus to contract manufacturing.
In the budget, the government proposed an amendment in the Cenvat (central value added tax) credit provisions to allow manufacturers or service providers to transfer tax credit to an outsourced unit, partially or fully. This was seen as encouraging outsourcing as companies can pass on accumulated tax credits.
The proposal has got stuck over the definition issue.
Industry has asked the government to resolve the matter when the finance bill is passed in the second half of the budget session that begins April 25.
Incidentally, companies that rely fully on outsourced manufacturing are the ones affected. Those that outsource and manufacture partially don't face any issue.
Tax experts said further streamlining of the provision is required.
“The new provision to allow transfer of credit to a job worker or contract manufacturer will reduce the cascading of taxes where some part of manufacturing is outsourced,“ said Bipin Sapra, partner, EY.“However, in case the entire manufacturing is outsourced, the credits on brand promotion etc. will not be available to the contractee.“
Sapra said a further concession in this regard will fully streamline the availability of credit in the case of contract manufacturing and incentivise such activity.
The government will need to tweak the definition of input services to include those that are covered. A small change is needed to say those that outsource or transfer manufacturing activity are also included in the definition of input service distributor. The piling up of Cenvat credit, in lieu of tax paid on inputs, to set off tax liabilities has been a longstanding issue for industry. The government had in this year's budget tried to address the issue, bringing relief to industry.
The Economic Times New Delhi,18th April 2016

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