OCTOBER 17, 2017

By R K Hasija, Advocate

AREA based exemptions granted under earlier Notification No. 50/2003-CE (for the state of Himachal Pradesh and Uttarakhand), Notification No. 56/2002-CE and 01/2010-CE for the state of Jammu & Kashmir and Notification No. 32/99-CE and 20/2017-CE (for the North Eastern States) are no more available after introduction of GST. However, Budgetary Grant has been introduced for eligible units in a different form after introduction of GST vide Notification dated 05.10.2017 issued by the Ministry of Commerce and Industry, Department of the Industrial Policy and Promotion.

Under earlier exemption notifications, in the States of Jammu & Kashmir as well as the North Eastern States, units were allowed to avail exemption by way of refund/self-credit mechanism of the Central Excise duty paid in the cash after exhausting available CENVAT credit. In other words, the duty paid in cash was allowed as refund/self-credit subject to value addition norms for different commodities. However, for the States of Himachal Pradesh and Uttarakhand, the scheme was different and there was an out-right exemption from payment of excise duty. The exemption under these notifications was available for a period of 10 years from the date of commencement of commercial production.

Several units, which had been availing the exemption under the above notifications, could not complete the term of 10 years under erstwhile Central Excise regime. They have a residual period during which they would have continued to enjoy the benefit of Central Excise exemption. Now under the GST era, a mechanism has been put in place vide Notification dated 05.10.2017 which provides that the eligible units which were availing these notifications will be allowed to avail benefit for the residual period to the extent of 29% of the IGST and 58% of CGST paid in cash after exhausting available Input Tax Credit (ITC). However, the restriction of value addition as applicable earlier under Jammu & Kashmir notifications and north eastern notifications has also been introduced for the State of Himachal Pradesh and Uttarakhand. Therefore, the units which were availing exemption under Notification No. 50/2003-CE are in a disadvantageous position vis-a-vis under the GST era. This can be a subject matter of litigation on the ground of promissory estoppel. Some stake holders may challenge the newly imposed restriction before the appropriate forum.

In any case of the matter, the new mechanism of exemption is explained as under:

The eligible units have to file the following documents, in order to continue to avail the benefit during the remaining period, with the AC/DC of Central GST.

1) Copy of the option filed before the Deputy Commissioner/Assistant Commissioner Central Excise for availing exemption under the relevant notifications.

2) Copy of the Document issued by the concerned Director of Industries evidencing commencement of commercial production.

3) Copy of the last monthly return for production and clearance of goods in respect of Jammu & Kashmir and North Eastern States and quarterly returns in respect of units of Himachal Pradesh and Uttarakhand.

4) An affidavit/Indemnity bond as per Annexure A to the notification on one time basis as a bond to pay the amount in case of wrong availment of the benefit under new policy.

These documents have to be filed as early as possible so that the team from DIPP may come and inspect as one time visit, based on which the benefit will be granted by the concerned Central Tax department.

The benefit will be available on the quarterly basis for which the claims would also be filed for each quarter. It is coming out from the scheme that the remaining 21% of IGST and 42 % of SGST paid in cash may be available as benefit from the States, as per recommendation of the 14th Finance Commission, which has to be seen if it is devolved.

As mentioned earlier, the benefit has been restricted to the value addition for various commodities as per table appended to the notification as under:

For calculation of value addition, the procedure laid down in Notification No. 01/2010-CE dated 06.02.2010 would be followed. As per the Notification No. 01/2010-CE, the value addition has to be calculated on the basis of financial record of the preceding financial year taking into account the following:

i) sale value of the said goods excluding taxes paid on the goods;

(ii) Less : Cost of raw materials and packing material consumed in the said goods;

(iii) Less : Cost of fuel consumed if eligible for input credit under ITC Rules;

(iv) Plus : Value of said goods available as inventory in the unit but not cleared, at the end of the financial year;

(v) Less : Value of said goods available as inventory in the unit but not cleared, at the end of the financial year preceding that under consideration

Unlike under Notification No. 01/2010-CE and 20/2007-CE, the provisions relating to facility of determination of special rate under the respective exemption notifications would not apply under this scheme. Therefore, one cannot ask for determination of special rate of value addition in case actual value addition is higher than that specified rate in the Table. It perforce follows that the grant would be available to the extent of tax payable on the prescribed value addition and out of that the refund will be restricted only to the 29% of IGST (58% of cGST) paid in cash after exhausting the available ITC. This can be explained as under:

Value of Raw materials = Rs. 100000/- carrying ITC @ 18% (Rs. 18000/-)

Assuming value addition of 50%, value of finished goods cleared Rs. 150000/-

IGST payable @ 18% (assuming rate of GST 18%) = Rs. 27000/-

IGST paid in cash after exhausting ITC of Rs. 18000/- = Rs. 9000/- (Centre's share -Rs.4500 & State's share Rs. 4500/-)

Value addition allowed as per the Table in Notification = 36%, i.e. Rs. 36000/-

IGST payable on Rs. 36000/- = Rs. 6480/- which obviously would be a part of IGST paid in cash after exhausting ITC.

Refund available under the new policy would be 29% of Rs. 6480/- = Rs.1879/-.

As would be seen from the above illustration, for the Units in Himachal Pradesh and Uttarakhand, the entire amount of Rs. 4500/- of Central share would have been exempt under the pre GST dispensation. Now this benefit would come down to Rs. 1879/- Thus the loss under GST mechanism would be Rs.2621. Thus, where ever the actual value addition is more than that specified in the table above, the units will suffer a net loss. On the contrary, if the actual value addition is less than the one notified, the unit will enjoy a net gain.

(The author is Chief Advisor, M/s GSTaxperts and the views expressed are strictly personal.)