NOVEMBER 07, 2017

By Shreya Mundhra, CA

MONTHS prior to the introduction of the GST, several manufacturers were worried about the fate of area based exemptions offered under the Central Excise /VAT laws.

The Government by Notification F. No. 10(1)/2017-DBA-II/NER dated 05.10.2017 , has thrown some light on the same.

In line with the decision approved by the Cabinet, the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (DIPP) has notified the scheme of Budgetary support under the GST Regime vide the aforesaid Notification.

In terms of the said Notification, the Central Government has decided to refund its share of CGST and IGST to the affected eligible industrial units in respect of specified goods manufactured during the residual period in the States of North East Region and Himalayan States. The amount of budgetary support allowed shall be sum of –

(i) 58% of the central tax paid through debit in cash ledger account after utilization of input tax credit

(ii) 29% of the integrated tax paid in cash through debit in the cash ledger account after utilization of the Input tax credit tax of the Central Tax and Integrated Tax

It has also been stated that the new scheme has been offered, as a ' measure of goodwill ', only to the units which availed the benefit of Central Excise exemption prior to coming into force of GST Regime.

Prior to implementation of GST, the government provided exemption from payment of excise duty by way of refund or upfront exemption to the industrial and production houses establishing their manufacturing units or undertaking substantial expansion in certain identified areas within specified time. The objective of the said schemes was to encourage entrepreneurial investment and to promote industrialization in such areas resulting in generation of local employment along with other facilities to be provided to such States.The Notifications providing for the benefit of area based exemptions under Excise stands rescinded vide Notification No. 21/2017-CE dated 18.07.2017 and have ceased to apply w.e.f. 01.07.2017.

Notification dated 05.10.2017 has been issued by the DIPP providing a reduced amount of reimbursement to the industries for the residual period. The share of 58% of reimbursement has been fixed taking into consideration that at present Central Government devolves 42% of the taxes on goods and services to the States as per the recommendation of the 14th Finance Commission. This partial reimbursement would result in the units losing out to the extent of the balance amount of exemption benefit promised to them earlier in the erstwhile Excise Laws.

This then brings us to the use of the words "measure of goodwill " in the said Notification. Whether the expression 'goodwill' has been used to avoid any legal actions or invoking the doctrine of promissory estoppel?Whether the industries operating in the backward areas and expecting returns in the long-term have been provided appropriate reimbursements as promised?

The act of 'goodwill' by the Government assuring partial returns isnaturally prejudicial to the units and is grossly offending the original promise. Does this mean that the affected units can get their grievances redressed?

There may be two plausible solutions to this problem. The industry may either consider making representations before the Ministry in this respect or try to get its claims enforced by way of petitions in the Court. The first scenario does not provide assurance to the issue faced by the units since the GST Council has already left the discretionary power to notify schemes of budgetary support to such units to the Central and State Governments. Also, the State governments would be unwilling to refund the tax collected on the basis of the schemes floated by the Central Government.

The second scenario involves filing Writ Petitions before Courts.

The important questions to be deliberated upon are–

- Whether the government is bound by its own promises and commitments?

- Whether the decision to put a cap on the reimbursement has been made arbitrarily?

The policy of promissory estoppel is an equitable principle. The principle of estoppel in India is a rule of evidence as per Section 115 of the Indian Evidence Act, 1872. The relevant portion of the section is extracted herein-below:

"When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe such a thing to be true and act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing."

If, by the above, it is determined that the doctrine of promissory estoppel can be invoked against the Government, the moot point is – under what situations?

Recently, in the case of State of Jammu & Kashmir vs. Trikuta Roller Flour Mills Pvt. Ltd. and Another [Order dated August 18, 2017 in CA 9844 to 9849 of 2011] ,the Hon'ble Supreme Court was required to assess the legality of the withdrawal of Notification bearing G.O. No. 318-GR of 1990, dated 30.11.1990, granting hundred per cent refund of central sales tax (CST), paid by SSI units in the state on raw materials purchased from outside the state for a period of 5years. The Notification was superseded by G.O. No. 253-Ind/DIC of 1993 dated 01.10.1993, restricting the refund to the maximum annual purchase turnover of Rs. 50 lacs to a unit holder. The respondents challenged the Notification on the principles of promissory estoppel, contending that having held forth a promise for grant of exemption from CST on raw materials purchased from outside the State for five years from the date of production, the appellant could not have withdrawn or modified the benefit before that time period. The Hon'ble Apex Court while considering the facts of the case, involving raising of false claims by SSI Units in the State, followed the decision in the case of Commissioner of Commercial Taxes (Asst.) vs. Dharmendra Trading Co., [Order dated May 5, 1988 in CA 2204 to 2247 of 1980 ] = 2002-TIOL-1803-SC-CT and held that in case of larger public interest, the Government may restrict or revoke the benefit provided by it.

Considering the intention of legislature with respect to the partial reimbursement provided for by the budgetary support scheme of the DIPP, the question as to whether the area based incentive was rescinded in public interest, seems to favour the revenue since the same has been provided as a 'measure of goodwill'.Also, without losing sight of the magnitude of problems faced by the industries,the answer to whether invoking the doctrine of promissory estoppel may be a reasonable measure for seeking relief in a situation where the erstwhile laws are not in existence will not be straightforward.

The intention of the law makers may have been to protect the interest of the public at large, but whether the budgetary support to the extent of 58% of Central tax and 29% of Integrated tax as prescribed in the notification has been arrived on the basis of a reasonable mechanism or not, has to be determined. The partial benefit has been provided for by the Government on the basis that 42% of the taxes is attributable to the States. This action of the Government seems to be unfair because of its failure to extend the period for which the benefit can be claimed by the assessees. If a rational method had been adopted for computation of the share of budgetary support by way of extension in the residual period, it would be understandable. However, the scheme floated by the Ministry speaks otherwise.

In my view, a prayer for adopting a robust and beneficial scheme for assessees who have made considerable investment in such geographical locations may be made. The establishment of the gross injustice on the assessees by the Government would however, depend upon the factual foundations to be laid before the courts. While one may have reasons to believe that the doctrine of promissory estoppel may be invoked as well as the percentage adopted for the partial reimbursement should be backed by reasonable substance, the assessees will have to wait and watch as to whether the courts will be willing to interfere in such matters.

(The author is Associate, M/s. Lakshmikumaran & Sridharan, Kolkata and the views expressed are strictly personal.)