Union Finance Ministry may impose a service tax on contract manufacturers in excise free states zones, it is learnt. The move to levy service tax on this group of companies is in the context of heavy losses of excise duty the government has been incurring over the years in excise free zones.

According to sources, the government had realized off late that it has been suffering major revenue loss on account of this concession despite imposing excise duty on MRP. A recent assessment of data, collected from various excise free zones, has revealed that the government suffered a revenue loss of Rs 300 crore so far.

This loss according to sources was due to the fact that many contract-manufacturing companies were misusing the benefit given to them. The contract manufacturers from tax-exempt states were selling the products at higher MRPs and they earned unreasonable profits as they are not paying excise duty.

Moreover to maximize profits, traders also prefer goods from exempt states as they are cheaper being excise free, but bear higher MRPs. Such unfair trade practices have been bothering the finance ministry for some time and it has now decided to set right the issue.

The excise benefit should go to companies that have set up their units to manufacture and market their own products. The situation that is now prevailing in the excise free states is that the contract manufacturers produce medicines cheap but sell it at very high prices. This is a serious case of misuse of a benefit given to SSIs, sources said.

With the election around in Himachal Pradesh, its not sure whether the Congress would take measure that might turn unfavourable for their vote banks, but it is up to the government to decide whether it wants to protect the interest of 300 odd manufacturers in the excise free zones or the 3,000 manufacturers who don't enjoy the excise exemption benefits," said sources.

Although the government has been deliberating over the issue of levying a service tax on the contract manufacturers for some time, it is only now the finance ministry has started considering to introduce the levy, the sources added.