Excise on branding to hit SMEs

The government's recent decision to include branding, labeling and packaging of automobile components as manufacturing and charge excise duty on the maximum retail price instead of factory cost is likely to hit the small and medium enterprises in a serious way.

Small and medium component makers, like their counterparts in other sectors, enjoy an excise exemption limit up to a turnover of Rs 1 crore.

With the new norm of charging excise duty on MRP from June 1, 2006, the number of parts which benefited from this exemption will come down, making many small components makers less viable.

Of the 500 members of the Automobile Component Manufacturers Association (ACMA), an estimated 200-odd are from small and medium sector. Apart from these, ACMA estimates that there are nearly 2000 other small component makers in India, who are not members of the association.

"For many large component companies, it made a lot of economic sense to buy smaller parts from the SMEs. But once this new norm is implemented, buying from smaller companies may not be attractive anymore," said Ashok Taneja, president, ACMA.

He further said that most of the SMEs in the component making business do not have brands or a sales network. Hence, they produce large quantities to be sold to bigger companies, who then brand, label and package them to be sold in the replacement market.

Taneja said that ACMA has written to the ministry of finance seeking a clarification on the new norm.

"When we were negotiating with countries like Thailand on the free trade agreement, we managed to exclude branding, labeling and packaging from the definition of manufacturing. But now we are including them as manufacturing for charging excise duty," he said.

Should these countries question this dichotomy in defining manufacturing, then the 'rules of origin' could be re-defined compromising India's position in the free trade agreement negotiations.

The Indian automobile component industry is estimated to be worth $10 billion, including exports of $2 billion.