Since years, it has been the policy of the Central as well as the State governments to provide tax incentives for operating in the specified areas, mainly in the north and north-eastern States under various schemes.
Such incentives are given by way of either through exemption from tax, deferment of tax liability or refund of tax paid. These schemes serve the twin objectives of development of industrially-backward areas as well as encouragement to industries that are considered to be critical for the economic development of the country.
The Government of India, Ministry of Commerce & Industry (Department of Industrial Policy & Promotion) issued a New Industrial Policy dated 07.01.2003 providing fiscal incentives to new industrial units and to existing units on their substantial expansion. The policy provided that new industrial units and existing industrial units on their substantial expansion which are set up in the growth centres, industrial estates and other areas as notified from time to time by the Central Government would be entitled to 100% excise duty exemption for 10 years, etc. Pursuant to the aforesaid policy, the Central Government, in public interest, issued notifications Nos. 49/2003 & 50/2003 dated 10.06.2003 under Section 5A of the Central Excise Act, 1944 granting exemption of excise duty on certain kinds of goods cleared from a unit located in an area specified therein. Such new industrial units or expanded existing units were eligible for excise duty exemptions for a period of ten years from the date of commercial production. Subsequently, a cut off date of 31.03.2010 was prescribed in the notification for availing the exemption benefit.
Area-based exemptions are of two types – refund-based exemptions determined on the aggregate refunds sanctioned (for the North-eastern States and Jammu & Kashmir) and outright exemptions (in Himachal Pradesh and Uttarakhand).
The fate of continuity of such area-based exemptions was unknown under the GST regime as the model GST law did not contain any provisions that gives clarity on this aspect. Since years, various industrial houses have made heavy capital investments in these geographically distant areas and many are still in the process of doing so.
However, the section 10 of the Model Law on GST empowers the Central Government or a State Government , on the recommendation of the Council, by notification, to exempt generally either absolutely or subject to such conditions as may be specified in the notification, goods and/or services of any specified description from the whole or any part of the tax leviable thereon.
The GST Council in the recent meeting held in October 2016 has decided to continue with the area based exemptions provided to the North-East and hill States when the goods and services tax (GST) regime kicks in from April 1, 2017.However, these will be provided as refunds, not as exemptions.
The Finance Minister in his press meet after the GST Council meeting has said that, “It was agreed that there would be levy of tax on all exempted entities under GST. The Centre or the State that gets the tax will then reimburse it to the exempted entity,”
Effect of the change in the pattern of exemption from outright pattern to refund pattern
Currently, two types of area-based exemption schemes are in operation. Manufacturing units in J&K and the NE get excise benefit by way of refunds; those in Himachal and Uttarakhand get outright exemption.
The excise exemption for J&K will expire in 2020 and in NE states by 2017. This means that those starting productions in the beginning of 2017 will continue to enjoy the excise benefit till 2027. Although the exemptions for HP and UK expired in 2010, the tax waiver will continue till 2020 in many cases.
While the change in the pattern of exemption will not have major effect in respect of the supplies made from the manufacturing units of Jammu and Kashmir and North Eastern States, as the same reimbursement pattern of exemption continues, the manufacturing units located in the Hilly states of Himachal and Uttarakhand will now have to gear up themselves for the reimbursement pattern of exemption.
Further not only the manufacturing units but also those units who supply goods from the Jammu and Kashmir, North Eastern States and the hilly states of Himachal and Uttarakhand have also come under the GST Net for their intra state and interstate supply of goods and services. A few examples of transaction of supply and the impact of GST on such supplies have been discussed below:
1. A manufacturer in Jammu and Kashmir / north Eastern states/ Hilly states supplies goods directly to his customer in Bangalore, Karnataka:
This is an interstate supply.Thus, the manufacturer has to pay IGST at the time of supply of goods through raising an invoice in the prescribed format. However since he is entitled to claim refund of the same this will not be passed on to the buyer of the goods. So the tax invoice issued will not have the IGST component. The IGST tax due on such sales will be paid by the seller of the goods at the time of filing returns. Further since the sale takes place in Karnataka, he has to charge SGST also in the invoice in addition to IGST at the rates prescribed by the Karnataka SGST Act. While the IGST is refundable to the manufacturer by the Central Government he will get the SGST exemption only if the Karnataka State SGST Act permits such an area based exemption. Presently under the VAT Regime, such area based exemptions given to these states are not included in the VAT Act of the other states. Thus, the products manufactured in the states enjoying area based exemption are chargeable to VAT in the destination states where they ultimately reach the hands of the customer.Thus, the tax invoice raised for this sale will have only SGST component.
2. A person in Jammu and Kashmir who has purchased goods from a manufacturer in Jammu and Kashmir / North Eastern States, Hilly states, and supplies the same to a buyer at Bangalore Karnataka.
This is an intrastate supply initially. At the time of supply from the manufacturers premises to the purchaser of goods, the manufacturer have to pay CGST and SGST . He will pass on the SGST credit to the purchaser of goods and claim refund of the CGST paid by him. Now if the purchaser of these goods in Jammu and Kashmir, sells this goods to a buyer in Bangalore, then he will pay the IGST which consists only of the SGST earlier paid by him at the time of purchase on which he would have taken an input credit and also SGST of the Karnataka state at the time of supply of goods. The buyer can take the credit of IGST and SGST and pass on the same as IGST and SGST to subsequent buyers.
3. A manufacturer in Jammu and Kashmir sends goods to his dealer/ warehouse in Bangalore for sale.
In this case it is just a supply of goods and no sale of goods is involved. Hence the manufacturer would supply such goods to his dealer on payment of IGST as it is an inter sate movement of goods. However he need not raise a tax invoice in this regard as no other tax is applicable and can be sent under bill of supply. At the time of filing returns he will pay IGST on the total of such value of such transactions as per the prevailing rate and claim refund of the same. The dealer or the warehouse keeper as the case may be may raise a tax invoice for the SGST involved in the sale during the sale of goods or services when it actually occurs.
Process of payment of duty
The process of payment of tax starts with the invoicing of goods and ends with the debit to the electronic ledgerin the GST portal.
Issue of invoice:
Section 23 (1) of the GST Model law provides that, A registered taxable person supplying, taxable goods shall issue, at the time of supply, a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed. Proviso (2) to section 23 of the GST Model Law further provides that, that a registered taxable person supplying non-taxable goods and/or services or paying tax under the provisions of section 8 shall issue, instead of a tax invoice, a bill of supply containing such particulars as may be prescribed.
Thus there is no mention in the GST Model law or the rules framed there under regarding the type of invoice to be issued by the supplier of taxable goods located in the states involved in area based exemption of GST. However,based on the provisions contained in the model Law relating to issue of invoices and the Draft GST invoicing Rules one can make the following inferences:
1. In respects of supplies involving transfer of material to related party organisations, dealers, warehouses which does not involve sale, only IGST is payable on the supply of goods from the states involved in area based exemptions. In such a case the IGST is refundable to the unit which manufactures the product and supplies it to the aforementioned parties. Since such a supply is eligible for exemption of tax through refund mechanism, the supplier of goods will not pass on the tax to the receiver of goods. Hence a tax invoice need not be raised, what is required is only a bill of supply relating to the transfer and value of goods. The supplier of goods will then include such supplies in his outward supply statement and upload in the common portal on the 10 of every month as per the Draft Return Rules on GST. He will then pay tax on such outward supplies effected from him along with his monthly return on 25th of the month by debiting the electronic tax liability Register maintained in the common portal vide section 35(7) of the model law on GST indicating his liability to pay the tax.
2. In respect of supplies made to a related party organisation in the same state or a warehouse or dealer in the same state, the unitis entitled for exemption of payment of tax through refund mechanism, thus the unit would raise a bill of supply as no tax is likely to be collected from the receiver of goods. The said supplier unit will pay the tax on the value of the goods supplied as per the outward supply statement uploaded on the common Portal on 10th of every month by debiting the Electronic tax Liability Register maintained in the common Portal as per section 35(7)of the GST Model Law indicating his liability to pay the tax.
3. In respect of supply of material to the third-party receiver of goods in the same state, the unit is liable to pay CGST and SGST of the state. However since the CGST component is not to be collected from the receiver of goods supplied, the same may not be included in the invoice. But since the SGST is not exempted, the supplier of the goods has to issue a tax invoice indicating only the SGST Component.After the close of the month of supply, the supplier of goods will upload a statement of outward supply of goods in the common portal under section 25(1) of the GST Model law. And on 25th of the month succeeding the month of supply, the supplier of goods will debit the electronic tax Register maintained in the common portal with is tax liability of both the CGST and the IGST components. And make payment of the same either through cash by debiting the electronic cash ledger maintained in the common portal or through debiting the electronic credit ledger maintained in the common portal.
4. In respect of supply of material to the third party receiver of goods in a different state, the unit is liable to pay IGST and SGST of the state since it is an interstate supply of goods. However since the supplier of goods is located in the state for which area based exemption is available through refund mechanism, the IGST is not to be charged to the receiver of goods. Hence the tax invoice raised by the supplier of goods will have only the SGST component of the receiving state. After the close of the month on the 10th of next month the supplier of goods has to upload his statement of outward supplies as per the requirement of section 25(1) of the Model Law of GST. After adjustment of the same with reference to the inward supply statement uploaded by his customer the supplier of goods debits the electronic tax liability register with the liability of IGST and SCST payable by him. Subsequent to this the IGST and SGST can be paid by cash by debiting the electronic cash ledger maintained in the common portal or out of the input credits available by debiting the electronic credit ledger maintained in the common portal.
Availment of credit on inputs and input services
The notification No. 20/2007-CE dated 25.04.2007 provides for utilisation of the CENVAT credit first in payment of duty in respect of the units located in the states where the area based exemption is given on refund basis, and any excess of duty paid over and above the utilisation of CENVAT credit is to be refunded. Thus the units which are located in the states included in the areas based exemption on refund basis are allowed to take CENVAT credit on inputs used in the manufacture of the goods . Since conditions subject to which the area based exemptions have been approved under the GST has not yet been finalised by the GST council at present it is not possible to say certainly that, the units located in the states included under area based exemption are eligible for availment of credit of tax paid on inward supply of goods and services, but since these units are required to pay taxes on their outward supply of goods and services and exemption is allowed only on the refund of tax basis, one can safely conclude that in line with the earlier scheme, these units also will be permitted to avail credit of the tax paid on the inward supply of goods and services and utilise such credits towards the payment of outward supplies and only the excess of duty paid over and above the input credit availed would be eligible for reimbursement.
Claim of refund
Section 38 of the GSTModel Law and the Draft GST Refund Rules issued by the Central Government govern the provisions relating to grant of refund of GST paid.
Section 38 of the GST Model law provides the procedure for claiming Refund, wherein it is stipulated that, any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application in that regard to the proper officer of IGST/CGST/SGST before the expiry of two years from the relevant date in such form and in such manner as may be prescribed.
While the time limit for claiming, refund has been fixed as two years from the relevant date, the manner of claiming refund has been prescribed in the Draft Refund Rules.
Rule 1(1) of the Draft GST Refund Rules provide that, any registered taxable person, claiming refund of any tax, interest,penalty, fees or any other amount paid by him, may file an application in FORM GST RFD-electronically through the Common Portal either directly or from a Facilitation Centre,notified by the Board or Commissioner.
The Rule 2 of the Draft Refund Rules provides for the documentary evidences which should be submitted along with the application claiming refund.
Thus the provisions contained in Section 38 and Rule 1 and 2 of the Draft GST Rule should apply to the cases of refund in respect of the units located in the states covered under the area based exemption of tax.
However it is pertinent to note that, the explanation A under section 38 provides the definition for the word refund as follows:
“refund” includes refund of tax on goods and/or services exported out of India or on inputs or input services used in the goods and/or services which are exported out of India, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilized input tax credit as provided under sub-section (2).
A simple reading of the above definition makes it clear that, refund of tax in the case of units located in the states involving area based exemption has not been included specifically under this definition. Hence the Rules provided under this section does not provide for specific requirement or manner in which the application should be filed for claiming refund in these cases. However since this is an inclusive definition the scope of which can be extended by including other types of refunds also under this definition. In such a case the procedure for refund in respect of the tax paid by the units located in the states involved in area based exemption of tax may also be included under this definition so that the draft GST Rules on refund becomes applicable to refund of taxes in these cases also or like in the earlier Central Excise Regime, Government will mention the terms and conditions subject to which the refund will be made along with the specific procedure to be followed for getting the refund. One has to wait and watch further announcements from Government in this regard.
(Author is Partnerwith IndTaxSeva Consultants, Hosur and have Experience in the filed of Indirect tax for more than 2 decades and can be reached at email: indtaxseva@gmail.com)
