GST hiccups for area-based tax exemptions

Even though the Centre and States have rolled out budgetary support, concerns remain

Area-based tax exemptions were introduced in a phased manner between 1998 to 2002. The objective was to ensure decentralised industrial growth so that remote, underdeveloped parts of the country could enjoy the boons of industrialisation, infrastructure development and employment generation. To ease migration pressure as well, huge tax sops were announced under State industrial policies to lure businesses into investing in various States.

As a result, industrialisation happened in Himachal Pradesh, Uttarakhand, Assam, Sikkim, Mizoram and Jammu and Kashmir in spite of constraints such as high logistic cost, insignificant local market, poor infrastructure and lack of skilled manpower. The fiscal incentives, primarily in the form of excise exemptions/refunds, were slated to continue for a minimum of 10 years with conditional extensions from time to time.

However, when the GST came into force, the GST Council decided to cease the exemptions, and pragmatically left it to the discretion of the Central and State governments to notify budgetary support schemes under GST for eligible units.

Left in the lurch

Following this, the Centre rolled out budgetary support to eligible units for the residual period, by way of partial reimbursement of 58 per cent of CGST (Central GST) and 29 per cent of IGST (Integrated GST) paid after utilisation of the available input taxes. The States, on their part, announced reimbursement of 42 per cent CGST and 100 per cent of SGST (State GST).

But several concerns have risen on this front. One, the refunds for inter-State transactions are significantly lesser than the actual incentives promised under the erstwhile schemes. Two, the proportionate credit of the capital goods is denied in the transitional phase.

Three, the eligibility of units in various cases has been disputed.

Four, the removal of the self-credit mechanism for refunds and reduced frequency of filing claims (from monthly to quarterly) has led to blockage of funds. Under the self-credit mechanism, eligible units could calculate the refund and take credit of the amount in the Personal Ledger Account (PLA) which could thereafter be used for payment of duty. The entire process was based on self-assessment, and protected by security deposit. Refunds are now stuck, with many units still waiting for the first such disbursement.

PLA credit

To make things worse, States such as J&K started issuing notices to some units seeking reversal of transitional credit carried over from PLA balance. Thanks to court decisions on various cases, these units availed themselves of credits pursuant to amount retained as one months’ deposit with the Excise Department. Even before the introduction of GST, the government had attempted to reduce the refund of 100 per cent excise duty benefits extended under State industrial policies, but courts provided respite by allowing 100 per cent refund.

The Supreme Court finally intervened in one of the cases to grant interim relief to the extent of half of the disputed amount.

However, the fate of the remaining 50 per cent PLA credit has been left under a shroud of uncertainty.

Since GST provided a limited period to carry forward transition amounts, many businesses decided to carry forward the disputed amounts into GST, based on the rights accrued to them.

The repercussions were notices and harassments from various tax authorities.

A year into GST, it is imperative that the government protects the economic interests of the industry without creating the need to knock on the doors of the courts. Positive action should be taken to develop far-flung areas in line with the vision of Make in India.

The writer is Partner, Khaitan & Co.

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