EOUs' local sales to be a little costlier

Hit by the rising rupee, many export-oriented units (EoUs), especially textile and garment manufacturers, are planning to sell more in the domestic market or what tax experts call the domestic tariff area (DTA).

But an excise notification of March 1 makes their goods marginally dearer for domestic consumers.

Now, EoUs willing to sell their goods in the DTA will have to pay an excise duty equivalent of Customs duty of 5 per cent, up from 2.5 per cent before the Budget (the duty was pegged at 25 per cent of peak Customs duty of 10 per cent).

The effective duty, including the additional 14.42 per cent in lieu of excise, now comes to 20.03 per cent against 19.39 per cent before the Budget.

"The DTA sales of EoUs will be marginally costlier. But they will be able to avail of CENVAT credit, except on the 5 per cent Customs duty for sales in the DTA," said Sachin Menon, executive director, PricewaterhouseCoopers (PwC).

EoUs can sell 50 per cent of the FOB (free-on-board) value of exports or a third of their production in the domestic market.

Despite this, importers will be better off buying from EoUs than importing the goods as these units will be 10 per cent cheaper because of the duty differential. "Buying from EoUs will still be 10 per cent cheaper," said Menon.

Though the effective Customs duty on standard imports has come down to 31.7 per cent from 34.13 per cent due to the excise cut (and the equivalent cut on the additional duty), EoUs will pay a lower duty of 20.03 per cent on DTA sales.

The reduction in the duty would benefit the companies using imported parts or raw material while it would hit the local manufacturers of these inputs.

PwC estimated that while the excise duty cuts would make goods cheaper by up to 3 per cent (the cumulative impact of the reduction in excise, VAT and local taxes), the change in income-tax slabs and increase in exemption limit would raise incomes by nearly 5 per cent.