A detailed set of guidelines would be put in place ensure that entities enjoying tax holidays during the grandfathering period do not suffer.
NEW DELHI: India Inc may not face a bumpy ride under the proposed goods and services tax (GST) regime that would witness elimination of tax holidays as the government is readying a detailed framework to ensure a smooth transition.
The Central Board of Excise & Customs (CBEC) has set up a panel to formulate the framework that could have wide ramifications for pharmaceuticals, FMCG and automobiles sectors that have thrived in the states enjoying area-based excise duty exemptions. “All these issues need to be worked out for smooth implementation,” said an official. A detailed set of guidelines would be put in place ensure that entities enjoying tax holidays during the grandfathering period do not suffer.
The finance ministry is also beginning stakeholder consultations with individual sectors — starting with ecommerce on Wednesday — to understand concerns on the proposed tax. A number of tax holidays given by states and exemptions by the centre will be terminated under the GST, a move that will help in keeping the tax rate lower. Those that enjoy tax holidays in the grandfathering period will have to move to a system wherein tax payment will have to be made upfront and reimbursed later through a refund mechanism.
A similar mechanism has been proposed for exporters. In many states such as Uttarakhand, a large number of units in the pharmaceutical and automobiles sectors are still enjoying excise duty and local tax holidays. The refund mechanism will allow these units to claim credit on tax paid on inputs and pay balance tax to the government to be reimbursed later.
The idea behind this is to keep the overall GST framework free of exemptions that would complicate it and rob it of some of the benefits. The refund mechanism would allow companies to continue to get the benefits that were promised to them in the grandfathering period.
The move, however, could create cash flow issues for companies that do not have to pay any tax or lower tax because of these exemptions. Tax experts say industry needs some reassurance and smooth refund system. “Industry needs a reassurance that the incentives committed to them in the present regime would be available to them in the GST regime as well,” said Bipin Sapra, partner, EY. The mode of giving this incentive should also be efficient to ensure that industry does not face unnecessary hiccups. The GST, which is expected to be rolled out from April 1, 2017, will replace multiple taxes on goods and services levied by both the centre and states.
ET view: Review makes sense
A panel to review these exemptions is a good idea. Such exemptions go against the principle of moving to the goods and services tax system where manufacturers can get credit for all the input taxes paid by them. Exemptions spell patronage, break the input tax credit chain and erode the tax base. One option is to grandfather past investments for business reasons. But the Task Force on GST set up by the 13th Finance Commission had recommended providing direct investment linked cash-subsidy to industry to promote balanced regional development. That’s a good idea.