MARCH 3, 2010

Budget 2010 - SSI Units – boon or bane?  

By G Prabhakara Sastry, Advocate

THE favours showered by the Finance Minister in the Budget for SSI Units are not that useful and infact appear to be a deliberate attempt to kill the ailing small scale Industries.

At the outset all of us should note that SSI exemption does not provide for any lower rate of duty when compared to the normal rate applicable for other units. Notification No.8/93 providing exemption for SSI units prescribe nil rate of duty upto 1.5 crores value of clearances and full rate thereafter.

This situation itself results in an inconvenient status for SSI units as the Industrial consumers will never like to buy from SSI units since purchases from other units will enable them to claim entire excise duty as cenvat.

The SSI unit is put to further disadvantage while availing full exemption upto 1.5 crores since they will not be eligible for cenvat credit on inputs and input services for making clearances upto 1.5 crores.

Because of this inherent difficulty, if the SSI Units decide to pay full duty and supply to the Industrial customer, even then such customer may not like to buy from SSI Units as the large scale unit can supply better quality and quantity with the shortest notice. Thus the only way the SSI unit can compete with large scale unit is by reducing the cost of production than by way of exemption/ concession in duties of excise. When the units in SSI sector are already undergoing these difficult situation, the Finance Minister makes a political experiment by way of sops to the small scale sector.

The Budget proposals 2010 give the following concession to these units.

++   Full cenvat on capital goods in the year of installation itself…

++   Payment of excise duty on quarterly basis as against monthly basis applicable inrespect of all other units.

++   For determining the SSI status for the above purposes, it is clarified that the units eligible for SSI exemptions are entitled for these benefits even if they are not availing such exemptions.

10.1 Small Scale sector:

10.1.1 There are two significant procedural relaxations/ concessions that have been made for the SSI sector. These are:

(i) Full Cenvat credit on capital goods in one instalment in the year of receipt of such capital goods in the factory

(ii) Payment of duty on quarterly rather than monthly basis

For this purpose, amendments have been made in the CENVAT Credit Rules, 2004 and Central Excise Rules, 2002. These amendments come into effect on the 1st of April, 2010. The important point about these relaxations is that they are available to any assessee who is „eligible' to claim SSI exemption regardless of whether he actually claims it or opts to pay duty. An “eligible” unit has been defined as one whose aggregate value of clearances did not exceed Rs. 4 crore in the preceding financial year. Moreover, the benefit is available to a unit that is eligible for the entire financial year even if it crosses the limit of Rs. 4 crore (aggregate value of clearances) during the year.

10.1.2 The date of filing of quarterly returns by SSI units is being aligned with the date for non-SSI units so that all returns are required to be filed by the 10th of the month following the said quarter.

Let us examining the first concession. A small scale unit in the normal case would involve investment of 30-40 lakhs out of which duties suffered capital goods could be in the range of about 20 lakhs. On the total value of 2 lakhs of duty the SSI unit is any way eligible for 1 lakh credit on par with any other unit.

By getting another 1 lakh credit one year in advance, the advantage by way of interest saving will be hardly 10-15 thousands for that year, which is not a substantial amount at all. On the contrary, the large scale units being setup by new manufacturer involving crores of Rupees of investment will be eligible for the same benefit of 100% cenvat on capital goods during the first year itself because the SSI exemption is determined basing on the aggregate value of clearances in the preceding financial year. Obviously a new manufacturer setting of the factory for the first time is entitled for SSI exemption during his first year of operation as the value of clearances for him in the preceding financial year is nil and hence less than 4 crores of ceiling limit prescribed under the said notification such big units will end up making substantial gains by way of liquidity and consequential saving in interest as well.

Thus the first package of concession to SSI units by way of 100% cenvat on capital goods is a benefit to the newly set up large scale units than to a real SSI unit.

Then comes the facility of payment of excise duty on quarterly basis.

At this juncture, I am reminded of a live case in fruit and vegetable market where local financials offer loans at unbelievable 11% (4105% pa) interest per day. They used to advance Rs.90 to the traders in the morning and collect Rs.100/- by evening. These vendors used to buy vegetables, fruits, flowers from farmers and sell for 130-140 Rupees, pay back Rs.90+10 as interest to the Financial and still make a profit of Rs.30-40. As against this, when the banks started financing 5-10 thousand Rupees at 12% pa to be repaid on monthly rests of 500-1000, many of the small vendors failed, not because the rate of interest is high, not because the business fell, but because they were never able to accumulate 500-1000 Rupees for repayment to the banks.

Identical will be the situation with small scale units. They are not able to accumulate the money for paying taxes on monthly basis. If they are made to pay taxes on quarterly basis they are sure to fail since it is impossible for them to accumulate and earmark the taxes for such a long time. The experience of the SSI units and the department would confirm that the defaults on monthly payments is more with SSI sector than with medium scale and large scale units. These big units, even if they have sudden financial crunch, they are able to get instant assistance from banks or private corporate financiers which is not the case for SSI units. Finally the units defaulting in paying periodically dues to the department are required to pay this same with interest of 24%. During the default period the unit is not allowed to avail cenvat credit as well. This condition will be the last nail in the coffin of the SSI unit and they can never recover once they default. The result/ the natural death for SSI units.

Is that what the Government is waiting for? Is that what the Government is ultimately planning? If it is so, what the Finance Minister did is the right thing The SSI sector will disappear from the Industrial Map of India without further loss of time.

Hope the Government would be bold enough to admit their ulterior goal or make corrective steps to protect and improve the dying small scale industry.