Area-based excise sops to continue under GST

The adop­tion of the goods and ser­vices tax (GST) won’t lead to untime­ly with­draw­al of the excise waivers for indus­tries in Jam­mu and Kash­mir, North­east­ern states, Uttarak­hand and Himachal Pradesh. These sops would con­tin­ue in some form or the oth­er under then GST regime, until their state-spe­cif­ic dead­lines that have already been set expire, offi­cial sources told FE.

How­ev­er, these duty exemp­tions will def­i­nite­ly not be extend­ed fur­ther. This is because the exemp­tions could pose dif­fi­cul­ties when it comes to tax­ing man­u­fac­tur­ing on the basis of the val­ue added.

The finance min­istry is look­ing at how to car­ry on with the excise exemp­tions noti­fied under law till their expiry dates along­side a new tax regime that seeks to remove the dis­tor­tions in the cur­rent system.

The excise duty break for J&K is set to expire in 2020, and in 2017 for North­east­ern states. Any pro­duc­er who start­ed pro­duc­tion before the cut-off date is eli­gi­ble for the exemp­tion for the next 10 years. This is true for Himachal Pradesh and Uttarak­hand, too, where the scheme expired in 2010 and but those he logged in ear­li­er con­tin­ue to ben­e­fit from the tax waivers.

The gov­ern­ment is hop­ing to roll out GST from April 1, 2016.

The cen­tral gov­ern­ment lost about Rs 18,000 crore by way of area-based excise duty exemp­tions in 2013–14. With­draw­ing the exemp­tions giv­en under the Cen­tral Excise Tar­iff Act before they expire could lead to a spate of lit­i­ga­tion as it would amount to chang­ing the state posi­tion sub­stan­tial­ly after induc­ing busi­ness­es to make the irrev­o­ca­ble deci­sion of com­mit­ting heavy invest­ments rely­ing on the promise of tax breaks.

Courts often give relief in such instances by restor­ing the ben­e­fit, hold­ing it as an enforce­able promise called ‘promis­so­ry estop­pel’. State action war­rant­ed by pub­lic pol­i­cy is an excep­tion to this doc­trine but GST is a mat­ter of tax reform, not a mat­ter of pub­lic pol­i­cy, unlike the duty ben­e­fits envis­aged under the indus­tri­al pol­i­cy, said a per­son privy to the development.

In the case of Jam­mu and Kash­mir and North­east­ern states, exemp­tion is giv­en by way of a refund, while pro­duc­ers in Uttarak­hand and Himachal Pradesh get out­right exemp­tion on the duty payable on the val­ue addi­tion made in these states.

One way of retain­ing the duty ben­e­fits along­side GST is to exempt man­u­fac­tur­ers in Uttarak­hand and Himachal Pradesh from CGST — the cen­tral government’s com­po­nent of GST. In the case of J&K and North­east­ern states, it could be col­lect­ed and then refund­ed the same way excise duty is refund­ed now.

“Avail­abil­i­ty of excise duty ben­e­fit ought to con­tin­ue and they will in the GST regime as well the same way state gov­ern­ments gave the option of deferred pay­ment of VAT to the extent sales tax relief was already in place when VAT was intro­duced,” said Prashant Desh­pande, senior direc­tor at Deloitte in India. “We have to take a view on this. We have more than a year’s time,” said a senior gov­ern­ment privy to the discussions.

Finance min­is­ter Arun Jait­ley is set to meet state finance min­is­ters on Thurs­day to dis­cuss a draft Con­sti­tu­tion Amend­ment Bill to rede­fine the tax­a­tion rights of the Union and state gov­ern­ments, the pri­ma­ry frame­work for a GST. “Par­lia­ment would then decide whether to send the tabled Bill to the stand­ing com­mit­tee on finance chaired by Veer­ap­pa Moily for exam­i­na­tion,” said a gov­ern­ment offi­cial. Once the Con­sti­tu­tion is amend­ed, the Cen­tre needs to make a CGST law and an IGST (CGST plus state GST or SGST) law, while states need to rat­i­fy the Con­sti­tu­tion amend­ment and pass SGST laws.