The finance ministry’s directive to tax officers not to reopen past records of automakers to enforce a Supreme Court verdict is sensible and pragmatic. The court, in a dispute between carmaker Fiat and the excise department, ruled that the company must pay excise duty on the normal price — manufacturing cost plus a reasonable profit margin — and not on the discounted price charged to customers in order to gain market share. Following the August 2012 ruling, the department sought information from other carmakers on their cost of production to check if they had short-paid duties. It posed the threat of retroactive taxation. Also, furnishing a large volume of information posed a huge compliance burden. Rightly, the directive, issued by the Central Board of Excise and Customs (CBEC), does away with the onerous requirement.
More important, it shows that the government does not want any fresh controversy over retroactive taxation that hurts investors. The larger point is that India should have predictable and clear tax laws to become an attractive auto hub. The Supreme Court’s ruling also says excise duty will be charged at normal price only in cases where companies aim to capture market share. The underlying principle is sound and should serve as the basis for taxation, of the prospective kind.
Rightly, the finance ministry has said the SC’s ruling will not be enforced blindly, and that tax officers should look at the facts and circumstances of each case. A company, for example, could sell goods at a discounted price if it wants to switch business or is unable to sell its inventory within a reasonable time. Excise duty will then be charged on the discounted price. However, a case-to-case decision could also spell arbitrariness. Clear rules are needed to obviate arbitrariness.
