By Shivam Mehta & Ekansh Agrawal
At a time when India is moving towards being one of the most favoured nations for foreign investors, there are still some parts of the country that require special attention. The idea of area-based incentives was simple but effective—invite investors and increase employment in tough terrains . What better than indirect tax benefits could achieve it? This led to relaxation of excise duty on value addition in the Northeast states, way back in 1999. Then joined the state of Jammu and Kashmir. Later, in 2003, the states of Uttaranchal (now called Uttarakhand) and Himachal Pradesh were granted upfront exemption from excise duty. The idea of granting tax exemption worked and there was huge influx of capital and thousands of units were set up in the span of two decades, giving tremendous push to employment and revenue in these states. Now, we are in the era of GST, and there have been serious concerns on the survival of the units in these regions in the absence of tax relief. Recently, the GST Council, in its 21st meeting, showed a green flag to the idea of continuing tax benefits to the units in these regions.
Surprisingly, it was the Department of Industries that came up with a budgetary scheme to support these units that were enjoying excise exemptions. What is to be looked at is whether the scheme truly carries forward the promises made by the government from the time the GST was conceptualised? When the GST was being conceptualised in the form of the First Discussion Paper on GST way back in 2009, it was suggested that such area-based exemptions should not be continued under the GST framework and, if at all needed, such schemes should be converted into cash refund schemes to maintain the seamless credit chain. The Budgetary Scheme does allow refund of taxes paid in cash, but limits the refund to the extent of 58% (29% for interstate) of the net central tax paid in cash.
The division of revenue between the Centre and states is sought as a justification for limiting the refund to 58% the taxes paid in cash. Limiting tax benefits on the ground of division of revenue does create a threat for the survival of the units in these regions and raises the obvious question of the possibility of challenging the said scheme decision on the ground of promissory estoppel. The withdrawal of tax benefit is not happening for the first time in India and judicial challenge on the ground of promissory estoppel against such withdrawals has not been very successful. The Supreme Court has held that withdrawal or modification of exemption can be done for just, valid and cogent reasons, especially to overcome misuse of tax benefits. Nevertheless, it will be interesting to witness a judicial review of this curtailment of tax benefits on the ground of being arbitrary, and thus, falling foul of Article 14 of the Constitution.
Another interesting fallout from the Budgetary Scheme seems to be the non-availability of tax benefits to activities such as packing of goods manufactured in the tax-free zone. In the pre-GST regime, activities such as retail packing of goods manufactured in units availing area-based benefits were entitled to tax benefits. However, the use of a restrictive meaning of the term “manufacture” in the Budgetary Scheme opens a Pandora’s box for entities that were lawfully availing tax benefits in the pre-GST regime. The term “manufacture” is almost identical to the one introduced under the Income-Tax Act in 2009 to avoid disputes arising in the context of income-tax concessions. What needs to be looked into is as to whether the introduction of the definition of manufacture in the scheme is aimed at avoiding possibilities of future disputes or is targeted to restrict the scope of the benefit. One can just hope that the government comes to the rescue of the units that were lawfully availing tax benefits in the pre-GST regime.
Moreover, the scheme grants benefits subject to an inspection by a team constituted by the Department of Industrial Policy & Promotion (DIPP), which will be empowered to scrutinise the implementation of the previous schemes. The said inspection report shall also be made available to the jurisdictional officer of GST. It will be interesting to see as to whether the team constituted under DIPP can inspect the eligibility status of the units in the past regime and whether exemption availed in the previous years can be questioned now. When GST is leading the way for reform, concerns emanating from the Budgetary Scheme, which is rather aimed at benefiting the citizens, surely appear to be a deviation. One can just hope that the government resolves these issues to make GST look “simpler” for area-based units and rewards those people who supported the government is improving infrastructure and creating employment.
Shivam Mehta is partner, Ekansh Agrawal is associate, Lakshmikumaran and Sridharan