Area-based excise sops to continue under GST

Dated 10th December, 2014

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.

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.

(This article is published in Financial Express on 10th Dec, 2014)