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Mumbai , Nov. 14

THE textile processing sector in Maharashtra, mainly dominated by small power and hand processing units, could find itself in a quandary if the Sales Tax Department has its way.

The Sales Tax Office has ruled that textile processing units, previously exempt from paying tax under the Works Contract Act (Re-enacted), 1989, have to pay tax now, with retrospective effect. Back taxes could date back to 1992. The affected units are those that accept fabric, process it and then return it to customers. Composite and integrated mills are unlikely to be affected by the move.

Members of some textile processing units, under the auspices of the Federation of Associations of Maharashtra (FAM), have said that they have been filing their sales tax returns regularly. They had at no time been intimated that such a situation would arise and had not made provisions to recover the same from their customers.

If the liabilities are to be recovered by the department — 3 to 4 per cent of the annual turnover — it could result in a liability of up to Rs 2 crore to Rs 4 crore for individual units.

According to Mr Kaval Mehra, Vice-Chairman, Synthetic and Art Silk Mill's Association Ltd, said if the Sales Tax Department were to recover the dues from individual units, the sale of properties and factories would not cover the liability. He added that closing such units — those involved in bleaching, dyeing and printing — would result in mass unemployment. It is estimated that there are 1 million workers, directly or indirectly, employed in this sector alone in Maharashtra. Processing units are also paying a 2 per cent cess under the Goods of Special Importance Act.

Mr Mehra estimated that in and around Mumbai, 200 such units would be affected and in Maharashtra about 500. He added that the neighbouring States such Gujarat and Rajasthan, would benefit if Maharashtra's units were to pass on this tax to its customers. Related industries, such as dyes and chemicals suppliers, machinery manufacturers and stores would also suffer. He estimated that export losses could even touch Rs 15,000 crore.

According to Mr Narendra R. Podar, Honorary Secretary, Maharashtra State Textile Hand Processors' Association, the move to implement the tax would amount to double taxation as the processors would have to pay this tax and the Cenvat.

While the Sales Tax Department of Mumbai has not yet issued a demand to be paid, processors are worried this latest development could break them.

Ironically, the issue has come to the fore because the Bombay High Court has delivered a judgement under the Maharashtra Sales Tax on the Transfer of Property in Goods involved in the execution of Works Contracts (Re-enacted) Act, 1989, in the case of Matushree Textile Ltd.

The issue regarding the liability under the Works Contract Act had earlier come up for consideration before the Commissioner of Sales Tax. The Commissioner held that the tax was payable on the Work Contract transactions under the provisions of the relevant Act. An appeal was filed before the Maharashtra Sales Tax Tribunal.

In its order dated August 5, 1995, the Tribunal held that though there was a transfer of property in goods, the same being too insignificant to take any cognizance, the provisions of the Works Contract Act were not attracted. Thereafter, a reference was filed by the Department before the Division Bench of the Bombay High Court.

According to the FAM, the case could not be defended strongly because Matushree Textile had by then wound up. The judgment was delivered in favour of the Sales Tax Department by the Bombay High Court on August 22, 2003.

Article E-Mail :: Comment :: Syndication

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