Under GST, the tax rate would be uniform. So it would not matter whether the plant is located in remote places of Himachal or in populated areas of Bihar, he said.
AHMEDABAD: Corporate decisions on locating a manufacturing unit would now depend on core economics and not tax arbitrage considerations once the upcoming Goods and Services Tax (GST) regime sets in, CII President Naushad Forbes said. Companies would need to rework their strategies because there would be little to gain in terms of tax holidays, Forbes said in an interview with ET.
“Companies will now start locating plants on the basis of economic sense instead of choosing areas where the taxes are lowest. So compulsions of tax arbitrage, which is part of a bad business strategy today, will go away. This will be a very productive gain,” Forbes said.
Under GST, the tax rate would be uniform. So it would not matter whether the plant is located in remote places of Himachal Pradesh or in populated areas of Bihar, he said.
Companies, domestic or multinationals, have been choosing small hill towns and remote parts of the country to take advantage of no-tax or low-tax regimes. The advantage will cease because as the GST model law reads today, the tax holiday would not be extended after September 16 when GST comes into force.
There is little incentive left for companies to invest in underdeveloped areas. Many companies, especially those in the fast moving consumer goods (FMCG) and auto sectors, are reaching out to state and central governments seeking clarity on whether there could be a way to grandfather tax incentives by state governments.
Hitherto, for a company investing Rs 5,000 crore in a remote area, the state government would exempt paying local taxes. If the tax holiday is for say, 10 years, the company was not required to pay VAT and CST for 10 years or for Rs 5,000 crore, whichever is earlier.
GST regime is slated to subsume state levies like VAT or CST. Also under GST, the taxes would be collected by a state where the goods are sold and not where the goods are manufactured, as in the current taxation system.
Getting back the credit from a separate state would be almost impossible. Many state governments, especially the hill states of Uttarakhand and Himachal Pradesh, would be worst affected as some of the backward areas in the states have tax holidays.
This could also affect other states like Gujarat and Tamil Nadu, where tax incentives were offered to a few automobile companies.
However, it would be good for India in the long run and benefits may start coming in by 2019-20, say experts. Industry trackers say that the decentralised manufacturing would mean higher growth for the country.
“From this will stem the main benefits GST will provide. That’s where the 1.5-2% increase in the GDP growth will come from. It will come from moving to a more economically rational location,” said Forbes.