The Ordnance Factory Board (OFB), that has drawn flak for being a white elephant leading to government considering a proposal to corporatize the organization, is also hit by goods and services tax (GST). The tax has cut down purchases by defence forces, bringing down the orders to OFB by 14% in terms of quantity. Lesser order book has affected the OFB’s cost-benefit ratio too, said sources. The additional cost due to GST has increased the outflow for the armed forces, which are the main buyers of OFB products. The increase in expenditure was compensated by reducing the orders proportionately, said sources dealing in the matter. The forces have to shell out nearly Rs 2,000 crore extra to meet the GST liability.
The OFB needs to get indents worth Rs 20,000 crore at least to maintain a feasible costing level. At present, the orders are at around Rs 17,000 crore, out of which nearly Rs 2,000 crore is the GST component. To lower the costs, the orders have to be more so that there is enough revenue to recover certain expenses and even reduce the pricing, said sources. Following an order issued in March 1993, products supplied by the OFB were exempted from excise duty. In 2015, a 12.5% excise duty was imposed on its products. As the tax had to be passed on to the buyer, the cost for the force increased by 12.5%. After excise was replaced by the GST, the tax component has further gone up. The factories have to shell out 18% GST on arms and ammunition which are the mainstay items of the organization. For supply of pistols to civilian market, a GST of 28% is levied. Even as the factories have been availing input tax credit on the supplies from sister factories and trade sources, it has still affected the cost, impacting the orders, said a source.
There are 41 ordnance factories under the OFB and Indian armed forces are the major buyers of the products which range from tanks, artillery guns to small arms and ammunition. Though both OFB and armed forces are government bodies, technically there is a buyer and seller relation between the two. Ordnance factory has to be paid by the armed forces for the products it supplies. The funds go from the overall defence budget, out of which the tax component has to be shelled out too. The OFB has always been facing flak for not being able to lower its costs. The orders have to be at an optimum level to maintain the ration. Although, on the brighter side, the supplies are still enough to meet the strategic requirement.