The 10-year tax holiday given in the form of area-based excise breaks for hill and northeast states will continue under the coming goods and services tax (GST) regime until the sunset date. The Centre is deliberating a compensation mechanism for manufacturing units availing excise exemption in Uttarakhand, Himachal Pradesh, Jammu & Kashmir (J&K) and states in the Northeast (N-E), for a seamless transition to the new regime, targeted for a rollout on April 1, 2017. Two types of area-based exemption schemes are in operation. Manufacturing units in J&K and the N-E get excise benefit by way of refunds; those in Himachal and Uttarakhand get outright exemption. “A decision is yet to be taken on this. Units availing exemption will most likely be compensated through a budgetary provision. The matter is under deliberation. Having given the exemption once, we cannot go back on the assurance. They might not get exemption under GST but will definitely get compensation. States and the Centre will have to work it out,” said a government official. The revenue forgone by the Centre by way of area-based excise duty exemptions was Rs 19,120 crore in 2015-16.
Officials argue that exemptions under GST will go against the proposed structure, of simplified and seamless credit. “Compensation could also be through a refund process under GST. There is no concrete solution as on date but units will be compensated. States will also have to take a call on valued added tax for the tax breaks they extend,” said an official. The excise exemption for J&K will expire in 2020 and in N-E states by 2017. This means that those starting production in, say, the beginning of 2017 will continue to enjoy the excise benefit till 2027. Although the exemptions for Himachal and Uttarakhand expired in 2010, the tax waiver will continue till 2020 in many cases. In the case of refund-based exemptions, the revenue impact is computed by aggregating the refunds actually sanctioned to the individual units. In the case of outright exemption, the revenue impact is calculated by using the difference between the general effective rate and the duty actually paid. The select committee in its report on GST argued that the ‘GST Council shall make recommendations to the Union and the States on special provision with respect to the states of Arunachal Pradesh, Assam, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.”