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This
article picks up one of the crucial issues currently
being debated by the corporates having set-ups in
various indirect tax havens such as Uttaranchal,
Himachal Pradesh and the Northeast states and enjoying
special incentives in the form of exemption/ refund of
excise duty/ value added tax (VAT) in addition to
exemption from electricity duty, waiver of stamp duty,
refund of entry tax, etc.
The
objective of extending tax benefits was essentially to
build industrial infrastructure and generate employment
in these industrially backward areas.
The
current regime of benefits extends either in the form of
exemption from payment of excise duty, or by way of
refund of the duty paid after utilising the Cenvat
credit.
As a result, the units do not pay the excise duty
payable on removal of goods from their factory or else
utilise the Cenvat credit, pay excise duty, and then
seek a refund.
The results of these efforts have paid off with
substantial growth witnessed in these zones.
For
instance, the Uttaranchal government reported an
industrial growth of 18% in 2005-06 from a mere 1.9% in
2001-02, achieved by extending these tax benefits.
Whether the exemption benefits prevalent under the
existing central excise and state VAT regimes would
continue and operate in a similar way under the new GST
regime is a very important question which should be
addressed by the government.
With
crores of rupees worth of investments committed in these
jurisdictions, the government needs to ensure that the
momentum generated is kept intact without affecting the
intended objective of ensuring a seamless movement of
goods and services, thus maintaining the tax credit
chain.
The joint
working group set-up by the empowered committee of state
finance ministers in its report on the draft GST model
did mention continuing with location-based excise and
VAT benefits by way of a refund mechanism.
The
government has recently indicated that it is looking at
the possible options to replace the excise duty
exemption under the GST regime.
If one
were to ascertain the government's approach in
continuing with tax benefits, it would be worthwhile to
peek into the past to see how such incentives were
treated at the time of transition from the sales tax
regime to the VAT regime.
It is
evident that region-based incentives were allowed to be
continued in different forms such as refund schemes,
deferment schemes or remission schemes.
For
instance, in Gujarat, the units already availing such
exemptions were provided an option to either avail the
remission benefit or opt for the deferment scheme.
Similarly,
the states of Uttar Pradesh, Haryana, Andhra Pradesh and
Tamil Nadu extended benefits by converting the then
existing exemption schemes into deferment schemes.
To
continue with outright exemption under the GST may not
be the correct approach, as it would break the tax
chain, resulting in a cascading effect of the tax levied
at each stage. For instance, it may result in the input
tax remaining a cost that companies are unable to pass
on to consumers.
Similarly,
the buyer of goods would not be able to take benefit of
tax embedded in the cost of goods, resulting in breaking
of the tax credit chain.
The
government may, therefore, either consider granting
direct subsidy based on capital investment or grant
refund of all duties/ taxes. However, the success of the
refund mechanism would lie in timely disbursement of
refund claimed by the units.
Whilst
introducing the refund mechanism, one of the important
aspects that need consideration is the method to refund
the tax paid by the incentive units on inter-state sales
made by them.
Presently,
the central sales tax (CST) applicable on inter-state
sales is collected by the originating state i.e. the
state where incentive units are established and
therefore, there were no issues for such state
government to grant refund of CST.
However,
under the GST regime, the GST applicable on inter-state
supplies would be collected by the consuming state. In
such a scenario, it is imperative the consuming state
compensates the originating state for the refund to be
provided by the latter to the incentive units.
The
government needs to iron out such issues for a seamless
introduction of the GST.
Though the government is bound by its actions under the
principle of promissory estoppel, the principle of
public policy may override it. Accordingly, where
withdrawing benefits is found to be in the public
interest, the same may be resorted to by the government,
notwithstanding its prior commitments.
Nonetheless, the government in the past has been seen as
keeping its commitments and extending the benefits it
had granted and on that basis, one could reasonably
assume continuance of such commitment.
The draft
white paper, expected shortly, should address such
issues and put to rest the fears in the minds of
corporates.
Source :
Daily News & Analysis, India, dated 18/08/2009
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