GST impact: Cos mull legal options over reduction in area-based exemptions

The exemptions were available to eligible manufacturing units in J&K, Uttarakhand, Himachal Pradesh and others for a period of 10 years

Following the introduction of the goods and services tax (GST), the reduction in area-based benefits that manufacturing units enjoy in some hill states and in the northeast have left many companies in a tizzy. Key sectors that have been impacted are consumer goods, automobile, and pharmaceutical.
 
Some firms are even contemplating whether to take the legal route to challenge the reduction in benefits under the new indirect tax regime on the basis of promissory estoppel, a legal principle that a promise is enforceable by law, even if made without formal consideration.
 
Industry representatives pointed out that many manufacturing units had made capital investments in these states based on the area-based schemes and planned their cash flows accordingly. Substantial reduction in exemption had impacted the competitive edge of the products manufactured in area-based units, said L Badri Narayanan, partner, Lakshmikumaran & Sridharan.
 
“Definitely, the tax benefit that one was getting earlier has shrunk, which is a matter of concern for many companies,” said Mayank Shah, category-head, Parle Products, the makers of Parle G biscuits.
 

Industries that made significant investments in these units over the past four-five years were likely to bear the brunt of the reduction in benefits, said experts. The exemptions were available to eligible manufacturing units in Jammu & Kashmir, Uttarakhand, Himachal Pradesh and various states in the northeastern India for a period of 10 years.
 
The Centre has come out with a scheme to provide budgetary support to the eligible manufacturing units availing these exemptions under the Excise Act. According to the scheme, the central government proposed to refund 58 per cent of the GST paid in cash. This is in line with the current devolution formula whereby the Centre keeps 58 per cent of tax collected and 42 per cent goes to the states.
 
Experts said the states were expected to make good the loss in exemption by reimbursing the affected companies for the remaining. With the GST being a consumption-based tax, industry representatives said it would be difficult to get refunds from the states. Till now, only J&K has considered reimbursing the businesses affected by the change in the tax regime. “The industry has engaged with both the cente and states on this issue and has also made some suggestions to ease the process outlined in the Department of Industrial Policy & Promotion circular,” said a spokesperson for FMCG major Hindustan Unilever (HUL).
 
The scheme of excise exemption in specific geographies has facilitated significant investments from a host of companies across various sectors, including several FMCG firms. HUL spokesperson said the company had invested significant amounts in the past couple of years in multiple factories in the states like Assam, Uttarakhand and Himachal Pradesh, facilitating industrial development in these states.
 
Legal experts said some of the affected companies were toying with the idea of invoking promissory estoppel, taking the government to court. However, they are divided over as to what extent this principle will be upheld by courts.
 
They pointed out that the Supreme Court had held that the government had the powers to review the policy from time to time on the basis of the impact of the same being beneficial or detrimental to the larger public interest, and may reduce the benefit so given.
 
“While, technically, there is a legal case, but these types of hiccups are bound to happen as such macro-level changes in tax structure take place,” said head of an FMCG company.
 
Industry players said those who were at the fag end of the benefit regime might not take the legal route, but prefer to work with respective state governments to mitigate the impact.