NOVEMBER 16, 2018

By Harsimrat S Brar

DEPARTMENT of Industrial Policy and Promotion (DIPP in short), Ministry of Commerce & Industries, Government of India brought out a Scheme w.e.f. 01.07.2017, vide Notification dated 05.10.17 issued vide F No. 10(1)/2017-DBA-II/NER, for eligible units located in States of Jammu & Kashmir, Uttarakhand, Himachal Pradesh and North Eastern States including Sikkim for residual period for each of the eligible unit in respect of specified goods, valid upto 30.06.2027. The same was stated to have been offered, as a measure of goodwill, only to the units which were eligible for drawing benefits under the earlier excise duty exemption/refund schemes operative in the said States but has no relation to the erstwhile schemes. The erstwhile notifications were issued under Section 5A(1) of the Central Excise Act, 1944 so all the provisions of the said Act were applicable to the actions performed in execution/availment of benefit of the said Notifications. The present scheme is being implemented based on a Notification issued by DIPP and the funds being disbursed are a grant from the Government of India just like subsidies. None of the provisions of GST law can be invoked either by the Government or an assessee in their favour in any matter pertaining to the budgetary support. The refund being sanctioned under erstwhile Notifications was withdrawn from the head - Basic Excise Duty, Education Cess and SHE Cess. In the present scenario the amount to be disbursed as budgetary support is received from the DIPP and only the amount received can be disbursed. Also, the undisbursed amount at the end of the financial year stands lapsed and cannot be used for the said purpose in the next financial year.

The GST Council in its meeting held on 30.09.2016 had noted that with the introduction of GST exemption from payment of indirect tax under any existing tax incentive scheme of Central or State Governments would no longer be available to the eligible units but left it to the respective Governments to mitigate their hardships. The Central government brought out the subject scheme to reimburse its share of the cash element of CGST and/or IGST to the said eligible units. The scheme had the value addition norms built into it similar to the Notifications in force in the Central Excise regime. However, amount admissible for disbursal to an eligible unit was restricted to the sum total of 58% of CGST and 29% of IGST paid in cash and found to be admissible after applying the value addition norms. It is not physically possible to reimburse the States' share of IGST as the same goes to the consuming State and not the originating State and the former would not feel obliged to do so. Further, most of the States have not come forward even to return their share of CGST to such eligible units. Thus, the eligible units have been adversely affected on the said count by introduction of GST.

The following issues need to be taken care of for better/proper implementation of the Scheme:

Speedy completion of inspection by DIPP teams - The Scheme envisages the Inspection of all the eligible units by a team of officials of DIPP. The refunds under the Scheme were to be disbursed provisionally for the first six months. i.e., July to December, 2017, and subsequent disbursals were contingent upon the positive verification reports by the DIPP which were to be uploaded electronically on the GSTN database. The progress on this front needs a lot of effort as a large number of the units are still to be inspected and the inspection reports of those already inspected have just recently started being received from DIPP.

Quick disbursal of budgetary support - The eligible units located in Uttarakhand and Himachal Pradesh were not paying any Central Excise Duty so had not made any provision for the same in their working capital requirements. In the rest of the States, they used to recycle the tax paid in one month, in the shape of self-credit or cash refund, to discharge their liability for the subsequent month. Now the said period, of at the most one month, has been stretched to more than one year and the working capital requirements on said count increased enormously. Funds for disbursal of budgetary support for the quarters ending September and December, 2017 were received in the last week of March, 2018 and most of the same had to be surrendered on 31.03.2018 due to the inability of the department to process the same in such a short time frame. The funds were subsequently received in June, 2018 and most of the claims for the period July-December, 2017 have been processed. However, the claims for the subsequent periods cannot be processed in the absence of verification reports by DIPP. The reports in respect of some of the units have started reaching the Commissionerates, but the nominal amounts of balance funds would be insufficient to clear the backlog and the next instalment of funds needs to be released by the DIPP urgently.

The following issues need to be examined for modification of the Scheme without any change in its scope based on the intent of the Government behind introduction thereof:

Eligible units - The eligible units have been defined as those which "are" availing the benefit of one of the Central Excise exemption Notifications. The Scheme was meant to provide succour to the units who were eligible to avail the benefits under the Central Excise Notifications. However, a section of units falling under the SSI limit have discovered to their dismay that they are at a double disadvantage under GST. On one hand the eligible units, who were their main buyers, do not want to buy from them if they work under composition scheme as the latter would have to pay the whole of the GST in cash but would not be eligible to avail budgetary support on the same in view of Explanation 1 in para 5.1(1). On the other hand, even if such SSI units opt to pay GST at normal rate they cannot claim the benefit of the subject Scheme as they were not "availing" the benefits under one of the "specified" Central Excise exemption Notifications "as on 01.07.2017". The Government should re-examine this issue and extend the Scheme to the most vulnerable section of the industry operating in the concerned States. This would also be in line with the thrust of the Government to support the MSME sector. Of course, the benefit under the subject Scheme is suggested to be provided only for the residual period based on the Date of Production already recorded in the certificates issued by the respective District Industries Centres to such SSI units.

Value Addition - The erstwhile Notifications under Central Excise had the concept of value addition built into them. Different value addition norms were prescribed for different products, depending upon the Chapter in which it fell and the raw material from which it was manufactured. The refund of the amount equal to the amount deposited in cash was admissible, after utilising the whole of the available Cenvat credit, subject to the value addition rates prescribed. If an assessee found that his rate of value addition was more than 115% of the rates prescribed in the Notification, he could apply for fixation of the special rate based upon the value addition achieved by him during the previous year.

The DIPP Notification allows budgetary support equal to 58% of CGST and 29% of IGST paid in cash by an assessee after utilising the whole of the available ITC of IGST and CGST, reduced by the same percentage as is the percentage value of inputs procured under Composition scheme out of total value of inputs procured. Further, in para 5.8 it is stated that

"Where the Central Tax or Integrated Tax paid on value addition is higher than the Central Tax or Integrated Tax worked out on the value addition shown in column (4) of the table below, the unit may be taken up for verification of the value addition."

The use of the word "may" instead of "shall" makes it discretionary for the sanctioning authority to take up the unit for verification of value addition. However, given the insertion of the said clause, obviously no officer would use his discretion and risk being accused of doling out favours and every assessee shall be mandatorily examined on value addition basis. But, the Notification is silent about what is to be done after undertaking the value addition study. Although the Explanation in para 5.8 states that

"For calculation of the value addition the procedure specified in notification no 01/2010-CE dated 06.02.2010 of the Department of Revenue as amended from time to time shall apply mutatis-mutandis."

Does it imply that the assessee would be eligible for budgetary support as per the actual value addition achieved only and not the actual cash paid? The said Explanation only talks of the procedure to calculate value addition. Here it is important to note that while the DIPP Notification specifically states that budgetary support equal to the 58/29% of CGST/IGST paid shall be refunded, on value addition it only suggests for a study to be conducted. Would the suggestion to study prevail over specific statement regarding eligibility is a point to ponder. To avoid litigation, it is suggested that the value addition restriction should be made mandatory as in the erstwhile Notifications, because that apparently was the intent behind insertion of the concept of value addition in the subject Notification.

Differential refund - The erstwhile Central Excise exemption Notifications had a provision for disbursal of differential refund, commonly called the "13th refund" after calculation of the amount of refund eligible on an annual basis. This was meant to compensate for the monthly variations in the availability of credit and those of sales due to seasonal/periodical variations in purchases and sales. A unit may procure raw material in bulk and may utilise it for manufacture and clearance of finished goods over a period of time resulting in Nil payment of GST through cash initially but mostly in cash only after the credit has been exhausted. In the absence of the provision for differential refund, the eligible unit would be at a loss as initially it will not be getting any refund and later on, the value addition norm would lead to deduction of a bulk of the amount paid in cash from the admissible Budgetary Support. It can be best understood from the following table:

Here, the value addition aspect has been ignored which is 48.33%. If the same is brought into play the refund admissible under Excise exemption would increase to Rs. 2,90,000/- and that under GST would be restricted to 48.33% of Rs. 3,00,000/-(total duty paid during the quarter July - September), i.e., Rs. 1,44,990/-. If the provision for differential refund is made in the subject Scheme, the amount of refund entitled to the party would be Rs. 2,16,000/-, i.e., same as under erstwhile exemption schemes and some parity with the erstwhile exemptions would be restored. This would be in line with the intent of the Government to disburse 58%/29% of the CGST/IGST paid in cash.

Manner of utilisation of ITC - The manner of utilisation of ITC is provided in Section 49 of the CGST Act, 2017 and similar provisions exist in the IGST, UTGST and SGST Acts. Sections 49A and 49B have been inserted vide the CGST Amendment Act, 2018 to further clarify and provide specific provisions for the same. It provides for utilisation of ITC of respective taxes, i.e., IST, CGST and SGST/UTGST for setting of the liability thereof. Next, they provide for utilisation of ITC of IGST for setting of liability of CGST and if any balance is available and some SGST/UTGST is liable to be paid, for setting the same. Next, if any ITC of CGST is available, the same is to be utilised for setting of the liability of IGST. Lastly, if there is any balance of SGST/UTGST after clearing the liability of SGST/UTGST, the same is to be utilised for discharging the liability of IGST. However, para 5.1(ii) of the DIPP Notification talks of mandatory utilisation of only IGST and CGST for discharge of liability of IGST.

Para 5.1 is reproduced below:

5.1 The amount of budgetary support under the scheme for specified goods manufactured by the eligible unit shall be sum total of -

(i) 58% of the Central tax paid through debit in the cash ledger account maintained by the unit in terms of subsection (1) of section 49 the Central Goods and Services Act, 2017 after utilization of the Input tax credit of the Central Tax and Integrated Tax.

(ii) 29% of the integrated tax paid through debit in the cash ledger account maintained by the unit in terms of section 20 of the Integrated Goods and Services Act, 2017 after utilization of the Input tax credit Tax of the Central Tax and Integrated Tax.

Provided where inputs are procured from a registered person operating under the Composition Scheme under Section 10 of the Central Goods and Services Act, 2017 the amount i.e. sum total of (i) & (ii) above shall be reduced by the same percentage as is the percentage value of inputs procured under Composition scheme out of total value of inputs procured.

Explanation:-

Explanation-I

a Sum total worked out under clause (i) & (ii) Rs. 200

b Percentage value of inputs procured under Composition Scheme out of total value of inputs procured 20%

c Admissible amount out of (a) above Rs(200-20% of 200) = Rs.160

Explanation- II

(a) Calculation of (ii) shall be followed by calculation of (i)

(b) To avail benefit of this scheme, eligible unit shall first utilize input tax credit of Central tax and Integrated tax and balance of liability, if any, shall be paid in cash and where this condition is not fulfilled, the reimbursement sanctioning officer shall reduce the amount of budgetary support payable to the extent credit of Central tax and integrated tax, is not utilized for payment of tax.

It means that an assessee may maintain balance of SGST, i.e., not utilise it for discharging liability of IGST, and pay the residual IGST in cash and claim budgetary support in respect of the same. If the framers of the DIPP Notification had envisioned the non-utilisaton of ITC of SGST for discharging the liability of IGST, its fine, else a clarification/amendment is due.

Secondly, the Explanation II(b) of para 5.1 states that the amount of budgetary support shall be reduced by the amount of credit of Central tax or Integrated tax not utilized for payment of tax. The claim is supposed to be filed on quarterly basis. There is scope for interpretation regarding whether the claim is to be calculated on monthly basis and the requirement of Nil balance of credit is for that particular month only in which the support is due to an assessee or the support is to be calculated on quarterly basis and the balance should be Nil at the end of the quarter. A clarification on the same should be issued.

Dispute resolution mechanism - No dispute resolution mechanism has been provided apparently due to the fact that the amount to be disbursed is "budgetary support", a grant and not "refund" of GST. Thus, the provisions of GST cannot be made applicable to the same. However, this binds the GST officers from taking any coercive action, except to refer the amounts recoverable to the District Magistrate for recovery thereof as arrears of land revenue. Also, it does not provide for any appellate mechanism where the amount not disbursed/rejected can be contested by the party or that incorrectly disbursed can be contested by the department. It is important to note that the budgetary support is different from the capital subsidy or other such schemes. The latter are one-time benefits whereas the former is a recurring benefit which is affected by umpteen dynamic factors. Already, assessees whose budgetary support claims have been rejected, wholly or partially, have filed appeals with Commissioner(Appeals), whereas neither the former can do so nor can the latter process such appeals. A dispute resolution mechanism is, therefore, a must and the same should be provided for post haste.

The Government in its quick introduction of the Budgetary Support Scheme had shown that it is very sensitive to the concerns of the industry and, therefore, remedial measures as well as clarifications, as suggested above, will go a long way in further improving the implementation of the subject scheme.

(The views expressed are strictly personal)