Last week, this column described how the government overturned the existing policy on cellular telephony and dealt a big blow to the cellular industry, in order to help regularise Reliance Infocomm's WiLL-mobile service.
This week, the column talks of how fickle government policy in another area, that of tax policy, is playing havoc with the consumer durables industry -- this, by the way, applies to several other industries as well, it's just that we're focusing on durables right now.
Till a few years ago, most state governments offered similar sort of incentives to producers, generally land and power at concessional rates, even sales tax exemptions for a certain number of years for intra-state sales. Reliance Petroleum, for instance, got sales tax benefits for setting up its refinery in Gujarat, Hyundai in Tamil Nadu, and so on.
Since, in the case of the durables industry, the sales tax component varies between 10 to 15 per cent of the maximum retail price, very often it is the deciding factor between which company's products will sell in a state, and whose won't.
In a state like Maharashtra, which accounts for around 14-15 per cent of all-India sales of several durables like refrigerators and air conditioners, for instance, manufacturers like Videocon and Onida have been getting a huge sales tax advantage for such a long time, it is difficult for other companies to compete with them.
Which is why, the only way that firms like LG have been able to enter this market is to supply through local manufacturers based in the state who've also got this concession.
Those companies that are not able to manufacture through third parties, perhaps due to their inability to fire workers and shut down plants in other parts of the country, naturally face a big disadvantage.
Such a situation itself plays havoc with the plans of any manufacturer -- should you locate in a state that is a good manufacturing destination, or should you locate yourself in markets that offer sales tax concessions, or should you just look at a third-party manufacturing in a tax haven state?
What has complicated things even more over the past few years, is the central government beginning to give excise duty concessions as well, to encourage industrialisation in certain areas.
While this began with the North East a few years ago, similar concessions were extended to Gujarat (to take care of the post-Kutch development in the state), to Jammu and Kashmir and then, earlier this year, to hilly areas like Himachal Pradesh and Uttaranchal Pradesh.
Considering that the excise duty on most durables is in the 16 per cent range, you can imagine the benefit to be got by locating in an area, which offers both excise and sales tax concessions -- Himachal Pradesh and Gujarat, for instance, fall in this category of states.
On the 'realisable value' (that's the value the manufacturer gets) of an air conditioner or a fridge, the two add up to a whopping 20-25 per cent. Given that there is such massive downtrading happening in the market, and 40 per cent of all direct-cool refrigerators, to cite just one instance, are in the sub-Rs 8,000 range today as compared to 25 per cent last year, such tax breaks are critical, to those who get them and those who don't.
While complex engineering products, like automobiles for instance, don't generally base their location strategies on such tax concessions alone, several consumer durable manufacturers do, as third-party manufacture is relatively easy.
Call it poetic justice if you will, but some companies that had begun production through third parties in the North East are now looking at moving to Uttaranchal and Himachal, since these are also closer to their customers!
According to a news story in this paper, Videocon plans to assemble 500,000 colour TVs and 200,000 air conditioners in Jammu and Kashmir through a Rs 30 crore (Rs 300 million) plant which will employ 500 people -- in under a year, just based on the excise duty concessions, the company will recover its investment, leaving it free, if it wishes, to follow the next tax incentive.
Samsung, similarly, sources 50-60 per cent of its air conditioners from J&K, and is expected to source more products from Himachal and Uttaranchal. LG plans to raise its 20 per cent sourcing from tax havens to 35 in the next two years, and Hitachi plans to add in Himachal a capacity similar to the one it already has in J&K.
All told, thanks to this treaty shopping, according to experts, around 40 per cent of the air conditioners sold in the market today do not pay excise duty -- the figure for refrigerators is around 10 per cent. Based on the plans of various manufacturers, this is likely to go up to 80 per cent for air conditioners by next year, and 20 per cent for refrigerators.
Also, around a fifth of all durables' sales do not incur sales tax. While that's bad news for state governments, the good news for consumers, of course, is that prices will further drop with higher tax-haven manufacturing. Of course, increased third-party manufacturing of well-known brands does raise some quality issues.
Some years ago, when the Pepsi and Coke battles were at an all-time high, and Pepsi was slapping all manner of suits on Coke in various markets -- for wooing its employees and contractors en masse in India, and for blocking access to wholesalers in Italy, for instance -- I remember seeing a cartoon where a marketing chief was introducing the all-new sales team to the CEO, a team full of lawyers, replete with black gowns and legal tomes!With government policy so fickle, yet so critical, perhaps companies would do well to look at including lawyers and tax consultants as a core part of their marketing teams.