Practical Solutions for treatment of Tax Concessions

Treatment of tax concessions/deferrals already granted is a contentious issue in the VAT Regime.

One of the much professed feature of VAT is neutrality without scope for rate variation for specific groups or entities. Tax Concession/Facility of deferral of tax granted in different States will remain in force for several years beyond March 2002. It is learnt that in Andhra Pradesh about 3500 manufacturers are eligible for tax holiday/deferment involving revenue of about Rs.8650 crores. The tax holiday in Andhra Pradesh extends upto 2006/07 and the deferment upto March 2028 (source apvatvision.com). The financial implications for other States is not known.

Should the concessions/deferral continue in the VAT Regime?

Can the Governments renege on the commitment on Tax Concessions and modify/cancel the concessions already committed?

Should all the States have a uniform policy on treatment of existing concessions?

Though there is no second opinion that there is no place for tax concessions in VAT, the interests of the Industry should be protected. A major proportion of the tax concessions has been granted mainly to very large industries with heavy capital investment. Considering the longer pay back period and substantial investment, these industries would have factored the tax benefits before committing huge capital. Is it fair to deny them the concession mid course?

With the current pitch on wooing foreign investment, the change of policy mid course will project the country in bad light. So the concessions should be allowed to be continued without of course compromising on the VAT structure laid down by the empowered committee.

EXISTING TAX CONCESSION SCHEMES

No fresh incentives have been granted by any of the States after 01/01/2000. The different kind of incentive schemes granted earlier and likely to continue in some cases upto even 2020 falls in the following categories.

• Exemption from payment of sales tax for a specified period based on investments made.

• Deferment of tax. The unit will charge sales tax in the invoices but will retain the sales tax as a loan to be repaid without interest after a specified period.

• Exemption on payment of tax on raw materials, capital goods and other inputs.

• Tax exemption as well as exemption on payment of tax on inputs

• Remission of tax. Under the remission model the manufacturer will charge VAT in the invoice, file the monthly return but retain the tax towards the incentive receivable by the unit.

PROPOSED TREATMENT OF TAX CONCESSIONS/DEFERRALS

The present proposal with reference to the existing concessions/ deferral is as follows:

• Units enjoying remission or deferment will have to pay tax on procurement of inputs and collect tax on sale of goods at usual VAT rates.

• Units enjoying remission will be converted into deferment with 30% extra period and amount.

• Units enjoying tax holiday will also be converted to deferment

• VAT liability of the units enjoying deferment of tax will continue to be deferred. The benefit of deferment will be continued for the unexpired period subject to the unused portion of the monetary ceiling.

ANALYSIS OF THE PROPOSAL AND SUGGESTIONS

The compulsory conversion of remission and tax concession schemes to deferment scheme with 30% extra period and amount may not compensate adequately the industry. There is nothing wrong with the proposal to convert exemptions to deferral so long as the net benefits accruing to the industry in the present concession scheme is not in any way reduced or diluted by the compulsory conversion to deferral scheme.

How to achieve this?

The deferment amount and period should be extended to the extent that the Net Present Value of return on the deferred payment of tax equals the NPV of return available under the concession scheme. This will mean that the payment period and amount will have to be more than 30% as proposed. Besides calculation of NPV is subjective and will have to be worked out separately in individual cases casting addition burden and confusion.

Besides, the compulsory conversion is open to legal challenge, which may take years to be resolved.

The department would agree that the recovery in deferment cases had been difficult as due to unpredictable industry cycle, it cannot be said with certainty that the prepayment would be as per schedule and the Government run the risk of losing the tax deferred if the unit is wound up.

In my opinion deferment of payment of tax should be discouraged. While keeping the deferment amount and period as per the present scheme, the industry should be given an attractive scheme to make up front payment of the tax collected on an agreeable calculation of the NPV of the tax payable in the future.

• DEFERMENT CASES

Should dealers eligible for deferral get input tax credit?

The dealer enjoying deferral should normally be eligible for input tax credit as the output tax is deemed to have been paid. Therefore, the input tax will be eligible to be offset against the output tax. If the input tax credit is more than the output tax, the dealer will have a credit balance. The issue of treatment of credit balance i.e. whether it will be allowed to be carried forward or should the dealer be given refund is to be addressed.

There may be a situation where the output tax exceeds the input tax credit. But for the operation of the deferral agreement, the dealer would have paid the tax as applicable. Will deferral in such a case will only be for the output tax payable as determined under the VAT Act?

The Government, may in the event of deferral units being permitted to avail input tax credit, face the predicament of giving input tax rebate and, may be, a refund without being able to realise the tax on the output.

The solution in such cases is to calculate the eligibility of the period of deferment and the quantum of deferment of tax based on the Output tax on sales, but restrict the actual deferment to the net tax payable after adjusting the input tax credit.

There would be no break in the VAT chain, Since the tax is deemed to have been paid, a dealer purchasing goods from a unit eligible for deferral, can take input tax credit.

In my opinion the deferment units should be give input tax credit as otherwise they would be in a disadvantageous position under VAT. At present these unit procure raw materials at a concessional rate of 3% (or such lower rate as may be in the respective States). Under VAT these units will have to procure the raw materials paying a higher rate of tax as applicable to the respective raw materials.

As already discussed I strongly recommend that the deferment units should be convinced to make an upfront payment of the NPV of the deferred benefits.

• TAX CONCESSIONS CASES

Concessions have been granted by the Government in the form of tax exemption for specified periods. In some cases, tax exemption has been granted on sales as well as purchase of raw materials/machinery by the units.

UNITS ENJOYING TAX CONCESSION ON SALES

The sale by the unit enjoying concession will be an exempted sale and therefore the benefit of input tax rebate will not be available. The implication to the unit will depend upon whether unit will have a net tax out flow or credit, had the concession not been available.

Denial of Input tax credit may be disadvantageous to the unit as the will have to pay tax on the raw materials at the applicable rate of VAT as against the present purchase of raw materials at 3% % (or such lower rate as may be in the respective States). The tax paid on inputs in excess of 3% may be refunded to the units.

The units may be given an option to forego the concession so far enjoyed or to continue with the tax concession scheme for the original tenure.

The VAT chain will commence from the dealer who had purchased from the unit enjoying tax concession sale by such dealers should attract the applicable rate of tax.

UNITS ENJOYING EXEMPTION ON PURCHASE OF RAW MATERIALS AND OTHER INPUTS

In several States tax concession/exemption have been granted on raw materials and other inputs purchased.

These units should be allowed to continue the exemption. The sale by the supplier to such units may be Zero rated and the refund of tax on inputs to the supplier may be restricted to the tax paid on excess of 3% or such other concessional rate of tax on purchase of raw materials a may be available at present on purchase of industrial raw materials. The reason for suggesting restriction on the input tax eligibility is that under the present sales tax Act, the supplier would have procured the raw material paying tat of 3%.

It is desirable that all the States have uniformity in the matter of treatment of existing concessions/deferrals.

29/01/2003