A match not made in heaven

INDUSTRIAL CLUSTERS: Leading players in Tamil Nadu's match box belt say tax avoidance by smaller companies will upset industry growth.

Centuries after man's serendipitous discovery of fire, the invention of matches gave him the power to control its flow. Few products have found consistent and repeated use over a human lifetime as the matchbox, and still fewer, so studiously taken for granted.

Price mechanisms governing India's Rs 2,700-crore matchbox market do not disturb the average Joe's sense of complacency with the product, still priced at an outrageously affordable 50 paise per pack.

Apart from the pitfalls of ubiquity is the fact that the growth of matchbox sales has averaged just over 2 per cent year-on-year. But little respite from the taxman is leaving the industry vulnerable to competitors like Pakistan and Indonesia, say industry representatives.

Besides the danger of a production glut hampering competitiveness, entrenched matchbox players now face competition from the huge unorganised sweat shops scattered across Tamil Nadu's southern districts. Aggravating the threat is the central value added tax (CENVAT) of 12 per cent, say matchbox makers.

"Unorganised matchbox makers in the small-scale sector are avoiding taxes worth Rs 120 crore every year, while the total CENVAT revenue from the industry is just Rs 55 crore," claims S Sriram Ashok, director of Sivakasi-based Asia Match Company.

Ashok heads the 200-member strong All-India Chamber of Match Industries (AICMI) as a fervent lobbyist for the cohort of organised matchbox makers in Tamil Nadu's famed matchbox belt.

Noting that match manufacturing combines handmade and machine-driven processes, Ashok says the problem is one of classification.

"We find that large numbers of small-scale match companies typically have a machine in place, but declare themselves as manufacturers of handmade matches, while bigger players who follow mechanised manufacturing processes are taxed at 12 per cent under CENVAT," he adds.

The crafting of a match-stick and the tiny paper board box is largely unchanged. The processes include splint arranging, splint dipping in a combustible admixture of potassium chloride and phosphorus, outer and inner box manufacture, dipped splint filling and final packing.

While most organised players have mechanised splint arranging and dipping facility, some have also turned dipped splint filling into a mechanised process.

A senior official of Sivakasi-based Sundaravel Match Industries alleges that the unorganised sector outsources dipped splints from the mechanised units and avoids tax under the current system in the guise of manufacturing a 100 per cent handmade product.

He notes that till 2003, when affixing of banderolls on match boxes was mandatory, there was 100 per cent tax compliance by the industry.

But in 2003, after specific rates of duty and banderolls were abolished, and CENVAT at an ad valorem rate based on sales instead of volumes was introduced, matches made without the aid of power were granted exemption from tax. "Now, tax avoidance has become the norm," says Ashok.

AICMI has petitioned Union Finance Minister P Chidambaram to exempt the entire match industry from CENVAT, and in its place, impose a 1 per cent cess.

The chamber hopes that the cess will be passed on to registered handmade match manufacturers through government agencies like KVIC under stipulated norms. This could help the subsidy go up to Rs 12 per bundle of 600 boxes each to subsidise labour costs.

"Alternatively, we had called for pruning CENVAT rates to 4 per cent from the current 12 per cent without the SSI general exemption to encourage tax compliance. But the latest Budget has made no provisions to the same," rue AICMI officials.

Of the estimated production of 90 million bundles (600 boxes each) every year, less than 18 million bundles are manufactured by the exemption category, according to AICMI figures.

The organised industry's output of 72 million bundles, after export of 6.60 million should bring in CENVAT revenue of Rs 175 crore, but the current tax collection is just Rs 55 crore, AICMI notes.

The Sivakasi-centric industry, which accounts for 75 per cent of India's matchbox output, provides alternative employment to the people in the rain-fed agriculture belt in southern Tamil Nadu.

So are the traditional strongholds of match box production which directly employs 300,000 people and even caters to the markets in South America, Africa, Fiji and New Zealand.