As the State Government looks to garner more revenue by tightening the value-added tax (VAT) rules, the pump industry here fears that the local manufacturers might be priced out of competition by their rivals from outside the state.

It is not only fresh investment within the State by the industry that might come for a serious re-think, but also Coimbatore-based manufacturers having a pan-India market presence might even look for investment in other states to remain competitive in those markets.

Component procurement

In an interaction with Business Line, a prominent pump industry source and a leader of the Southern India Engineering Manufacturers’ Association (SIEMA), Coimbatore, said the pump industry here depends on component suppliers located in other states for nearly 50 per cent of its requirements.

At the instance of the pump industry, the component suppliers from states like Maharashtra, Gujarat and Karnataka opened offices here to facilitate component procurement by the industry.

VAT amendment

He said recently the State Government had amended the rules making VAT benefit applicable only to sales made within Tamil Nadu.

This would impact the pump manufacturers seriously since the quantum of sales within the State, at least for most of the organised players, was just about 20-35 per cent of their production.

It was the upcountry market that accounted for a major portion of their revenue. Hence, a major chunk of their production would not be able to avail the VAT benefit.

This might lead the manufacturers here to ask their component suppliers to directly bill for the supplies they make, instead of billing them through their offices here. This would only result in revenue loss to the State since the buyers would pay the 2 per cent Central Sales Tax (CST) to save on tax outgo.

The representative of SIEMA, which is an umbrella organisation of the engineering industries in the region, said only the organised sector within the pump industry having about 70 market share would be hit by the amended rules, while the unorganised sector might be spared.

However, this would make the organised sector lose its competitive edge because of the tax advantage enjoyed by unorganised players.

The SIEMA source feared that the denial of VAT benefits to finished products supplied to outside the State would push up their cost by around 3 per cent.

This would make the pumps produced here costlier than produces made elsewhere affecting their sales. The State would ultimately lose revenue because of lower sales outside Tamil Nadu.

Slowdown on fresh investments

He said the Government decision might also make the pump manufacturers here to go slow on fresh investments within the State and also look for new capacity creation outside Tamil Nadu. Already, because of infrastructure problems, the cost of production in Tamil Nadu was higher than elsewhere.

For instance, castings producers from Agra were willing to supply them at Rs 48/kg where as in Coimbatore, the product costs Rs 62/kg. Because of power cut alone, the price of castings had gone up by Rs 3-Rs 4 per kg here.

He said the net loss because of the amended rules was huge for the industry since the three per cent tax loss was higher than the pre-tax margin for many players in the industry.

R.R. Balasundharam, President, Indian Chamber of Commerce and Industry (ICCI), Coimbatore, who had recently represented on this issue to S.K. Prabakar, Principal Secretary, Commercial Taxes, Tamil Nadu, said not only pump manufacturers but several others would be hit by the move.

Input tax credit

He said ICCI had pointed out that the new rules required dealers making inter-state sales to registered dealers (sales against C form) to reverse 3 per cent of input tax credit with effect from November 11.

This would push up the cost of goods sold outside the State since it could not be adjusted or carried over, leading to decline in profit or increase in cost. He feared that this would erode the competitiveness of local manufacturers.

Balasundharam pointed out that apart from pumps and motors, Coimbatore was home to a host of other industries like textile machinery, auto components etc. A significant portion of their business was from outside the state.

If the VAT benefit was denied to these industries on a substantial part of their business, it would put enormous pressure on their margin and profitability, and he appealed for its restoration.