The finance ministry has moved to plug an estimated Rs 800-crore (Rs 8-billion) leak in the excise revenue stream due to tax exemptions given to companies, including soft drinks and tyre manufacturers, who use sugar, textiles and tobacco as intermediate products.

The ministry has begun consultations with the law ministry to decide if the scope of the set offs given in the Budget 2003-04 can be modified, through the issue of a notification or will have to await the next Budget.

Budget 2003-04 had liberalised the conditions, under which companies could seek credit for tax paid on use of sugar, textiles and tobacco as intermediate products against their final products, under Cenvat rules.

These amendments were brought about in the Budget by amending clauses 143 and 144 of the Central Excise Act, 1944 and notifications issued under the Additional Duties of Excise (Goods of Special Importance Act), 1957.

Revenue loss

The Budget 2003-04 had liberalised the conditions, under which companies could seek credit for tax paid on use of sugar, textiles and tobacco as intermediate products against their final products, under Cenvat rules The ministry has begun consultations with the law ministry to decide if the scope of the set offs given in the Budget 2003-04 can be modified, through the issue of a notification or will have to await the next Budget The government has already lost Rs 800 crore in the excise revenue stream due to the tax exemptions to the manufacturers The ministry has estimated that it lost about Rs 250 crore from just the tyre manufacturers, who use certain textiles for the finished product. Similarly, the aerated water industry uses a large quantity of sugar as an intermediate

Through these amendments, the finance ministry had allowed companies to claim even retrospective refunds under the Cenvat rules. The ministry has estimated that it lost about Rs 250 crore (Rs 2.5 billion) from just the tyre manufacturers, who use certain textiles for the finished product.

Similarly, the aerated water industry uses a large quantity of sugar as an intermediate. The government sources said they had not anticipated that the scale of the revenue loss would be so large.

The problem had arisen because it was envisaged under the amendments, that the companies could take the benefit with effect from July 2000, when the Eleventh Finance Commission gave its award.

Under the Commissions's award, the AED goods were brought under the ambit of the Centre's tax net. (The tax had been introduced to compensate the states for not levying sales tax on them instead)

The justification for including AED in the Central tax kitty was that the states would get a larger percentage of 29.5 per cent of the Centre's gross tax revenue instead.

Industry groups have been petitioning the Centre for the past couple of years, that since the tax collection was now centralised there should be no diffficulty in giving them the credit and refunds.

Bowing to the demands from the different industry groups, the finance ministry has made the changes in the Finance Act 2003. However, in trying to undo the damage, the stand taken by the ministry itself in its reply to audit queries on similar set offs has queered the matter.