Maharashtra introduces ultra mega project category for investments above Rs 1,500 cr

Tweaks VAT set-off claim norms for auto and non-auto sectors; Tata Motors, M&M, VW, Bajaj Auto decide to invest a total of Rs 11,500 cr

The Assembly polls-bound Congress & Nationalist Congress Party (NCP) government in Maharashtra has carved out a special category of ultra mega project for investments over Rs 1,500 crore. The incentive that the companies will get is that the VAT set-off claim will be on gross sales basis instead on the basis of net sales. This led Tata Motors, M&M, Volkswagen and Bajaj Auto to announce a total investment of Rs 11,500 crore for expansion in the state. These auto majors had threatened to leave Maharashtra and invest in other states after the state government had brought the amendments to the Maharashtra VAT Act with effect from April 1, 2011 whereby the VAT set-off claim was on net sales basis and not on gross sales basis.

Tata Motors and M&M will invest Rs 4,000 crore each in Chakan, Rs 2,000 crore will be pumped in by Bajaj Auto in Aurangabad and Rs 1,500 crore by Volkswagen in Chakan at its existing project site. Both M&M and Bajaj Auto have expressed their desire to produce new models after expansion.

Maharashtra Industrial Development Corporation (MIDC) chief executive officer Bhushan Gagrani told Business Standard: "The investor under the ultra mega project in auto and non-auto sectors with an investment of Rs 1,500 crore plus is now entitled to make VAT set off claim on gross sales basis. However, there is a rider that the VAT set off claim will not exceed 12.5% of the total eligible VAT refund in a year." According to Gagrani, ultra mega project category is in addition to  the existing mega project category, which covers projects with investments of Rs 500 crore and bove.

"These companies were in constant dialogue with the state government and MIDC for over two years. They did not rush to implement investment plan outside but ultimately decided to invest in Maharashtra after ultra mega project category with VAT set off claim on gross sales basis was brought it," Gagrani said. He added that M&M had indicated to invest in Madhya Pradesh while Bajaj Auto in north India following amendment to the Maharashtra VAT Act.

A senior government official, who did not want to be named, recalled that the 52 (A) amendment to the Maharashtra VAT Act had prevented companies from claiming higher input tax credit (ITC). "Earlier, auto makers would formally sell their entire production from the manufacturing arm to the marketing and sales arm to claim VAT set-off for sales within Maharashtra. The marketing arm would then, in effect, bill this to other states across the country. However, under a revised rule, the companies were unable to claim the VAT set-off on products sold outside the state.”

Incidentally, both Chief Minister Prithviraj Chavan and Deputy Chief Minister Ajit Pawar were opposed to reversal of the amended VAT set-off scheme as the state had to bear the annual burden of at least Rs 7,000 crore.

A senior minister agreed that the government and the industry were unable to arrive at a consensus in this regard.  Furthermore, the state industries department and Ernst and Young looked into the issue but failed to come up with a solution agreeable to the auto industry.