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: of the view that the entire amount is liable to be taxed. How refund of indirect taxes on inputs for exports could be classified as income remains an open question.
We are manufacturers of electronic components used in manufacturing of television sets. We are planning expansion and are interested in setting up a new plant. Many states are offering incentives, such as Excise and Sales Tax exemptions. We are thinking of Baddi (Himachal) or Hardwar (Uttaranchal) or Silwasa. We would be grateful if you could suggest the best location.
—RS Verma, El Vee Electronics, Noida
The way Indian reforms in the indirect taxes are heading, it would not be wise for you to locate your new plant based on exemptions of indirect taxes alone. There should be a compelling business case, other than such incentives. Lets first take the excise exemption. If a state offers you exemption of excise on your final product, this means you would not able to claim credit of excise paid on your inputs.
Second, the coverage of service tax will be increasingly widened, unless you are part of the Cenvat chain, you would not be able to claim credit of service tax either. The combined incidence of excise and service tax would be substantial and would be absorbed in your cost, as your buyer would not be able to claim credit of excise. The Cenvat chain would break.
With state Vat replacing Sales Tax in most states, the same would happen in case of sales tax exemption. The cost for your buyer will be higher because he would not be able to claim credit of Vat paid on inputs. The Vat chain would also break.
Keeping in view that the product yo are manufacturing is to be consumed by another manufacturing unit, it is very important that you remain part of the chain either Vat or Cenvat, so that your buyer is able to claim credit of the taxes on inputs. As a country we are slowly but steadily moving in a direction such that in a few years time, there would be a single regime of indirect taxes across the country—where Central Excise and Service Tax (manufacturing stage Vat) and State Sales Tax/ Vat (retail stage destination base) would all merge into one Goods and Service Tax (GST). In such a scenario, the incentives offered by the states would become not only redundant, but a...
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