Tax benefit cloud over plants in Northeast, hilly states

Manufacturing units in Uttarakhand, Himachal Pradesh, Jammu & Kashmir and Northeastern states enjoyed 100% central excise exemption prior to the GST roll-out

Manufacturing units in the hilly and northeastern states have been left perplexed by the ambiguity over the continuation of tax benefits under the goods and services tax (GST) regime.

A reduction of 42 per cent in the tax benefit, the unavailability of an appeals mechanism, and the restriction on refunds for job work cost are the key concerns of the industry. Tax experts say the current scenario would make manufacturing unattractive in these states.

The Department of Industrial Policy and Promotion (DIPP) issued guidelines a few days back, notifying that tax benefits would be extended to industrial units in these states by way of refunds to the tune of 58 per cent of the central GST (CGST).

Manufacturing units in Uttarakhand, Himachal Pradesh, Jammu & Kashmir and the Northeastern states enjoyed a 100 per cent exemption in central excise duty prior to the GST roll-out. The Centre has argued that since it passes on 42 per cent to states by way of devolution, it will pay its share to reimburse these units.

Hindustan Unilever, Dabur, Marico, Emami, and Berger Paints are among the many players with manufacturing facilities in these states.

The industry is concerned about the benefits in case of third-party manufacturing. Several large industries give out manufacturing contracts to smaller players in these states.  

“It is not clear how this mechanism will work if goods are manufactured by a third party, either under job work or contract manufacturing model. If the refund is a function of the amount paid to such third parties, then it will get significantly diluted. There are many aspects which need clarification,” said Pratik Jain of PwC India.

The budgetary support of Rs 27,413 crore for the scheme has been approved for a 10-year period for an estimated 4,000 units. The Cabinet had approved the scheme in August.

The DIPP said the refund would be available only on the portion of tax paid in cash after all the accumulated input tax credit had been utilised to pay the central and integrated GST. If the ITC is not fully utilised, the reimbursement sanctioning officer will reduce the amount of budgetary support payable to the extent credit of central tax and integrated tax is not utilised for payment of tax, the department said.

Bipin Sapra of EY said that “industry is looking to get back benefits which are now going to the state. Now states should make an effort to reimburse units.”

The excise exemption for J&K is to expire in 2020 and Northeastern states by 2017. This means that those starting production in say beginning of 2017, will have continued to enjoy the excise benefit for the next 10 years till 2027. Although the exemptions for Himachal and Uttarakhand expired in 2010, the tax waiver was to continue till 2020 in many cases.

Companies have reportedly made huge investments on the assurance of the government that the benefit would be provided and that the benefits will be grandfathered even under the GST regime. “We seem to have no clue what amount to be accrued in the balance sheet, which is impacting our financial health. There is uncertainty over whether we should continue with the set up in the hilly states now,” said a senior executive from a large chemicals company.