GST won’t signal curtains for manufacturers’ sops in hill states

Manufacturing units in the north-east, Kutch, Himachal Pradesh, Uttarakhand and Jammu & Kashmir will continue to enjoy excise duty benefit even after the levy is replaced with the goods and services tax (GST) on April 1, 2010.

NEW DELHI: Manufacturing units in the north-east, Kutch, Himachal Pradesh, Uttarakhand and Jammu & Kashmir will continue to enjoy excise duty benefit even after the levy is replaced with the goods and services tax (GST) on April 1, 2010.

Officials from the Centre and states working on the structure of the GST are looking at the options that would replace the duty exemption and provide compensation equivalent to the present benefit enjoyed by these units, a government official privy to the deliberations told ET.

While Kutch and the north-eastern states reimburse the excise duty paid by manufacturing units, Himachal Pradesh, Uttarakhand and Jammu & Kashmir exempt such units from the tax. The Centre���s area-based exemption is aimed at encouraging investment in these industrially-backward regions.

The excise duty benefit enjoyed by the north-eastern states will end in 2017. Although the exemption in Kutch, Himachal Pradesh, Uttarakhand and Jammu & Kashmir is available only till March 31, 2010, investments in these states till then will enjoy the benefit for another 10 years.

A report by the joint working group set up by the empowered committee of state finance ministers had recommended withdrawal of area- and industry-based exemptions. If there is a need to provide an incentive, it should be in the form of a direct subsidy as this would help in keeping the GST rate low by expanding the tax base, the report had said.

The proposed GST will subsume central taxes, including excise duty and service tax, and state taxes, such as value-added tax.

Tax experts, too, feel that refund mechanism is the preferred method. ���Fundamentally, it is important not to break the chain. So, it would be preferred if, instead of an outright exemption, a refund mechanism is opted for to provide incentives for both central as well as state-level GST,��� said S Madhvan, leader of indirect tax practice at PricewaterhouseCoopers.

The government incurred a loss of an estimated Rs 10,327 crore in 2008-09 in revenues on account of this exemption, according to Budget 2009-10.