GST Effect: FMCG, Auto Cos In a Fix Over Tax Holiday Offered by States

HP, Uttarakhand, Gujarat, TN to be worst hit as some of the backward areas in the states have tax holidays
Many companies, especially 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 because under the goods and services tax (GST) regime, the ongoing tax holidays for investing in underdeveloped areas would mean little.

“This is not just a tax issue; it is a sensitive political issue. While many companies that had invested in these areas due to lower taxation will see rising costs, state governments may not be able to abide by the MOUs they had signed with these companies,“ said a person close to the development.

In many cases the companies are far from their sunset clauses or the time frame when they no longer are eligible for tax exemptions.

The government may not be in a position to continue the current exemptions once GST comes into play. Industry experts say this could also lead to litigation between companies and the government. The government may not be in a position to continue the current exemptions once GST comes into play.People in the know said that some of the state governments have also reached out to the centre on the issue.

The way it happened till now was that a state government would declare that they would give tax incentive in a particular area. Say a company invested . 5,000 crore in that area; the state go` vernment would exempt the company from paying local taxes. If the tax holiday is for say 10 years, the company need not pay VAT and CST for 10 years or for `. 5,000 crore, whichever is earlier.

“The tax holidays or the area based incentives based on the VAT, CST refund or exemption that were extended by the state governments, may get negatively impacted in the GST regime, as the state may not be in a position to refund or exempt GST part of the incentive. There is no discussion or any hint in the model law (on) how to deal with this situation,“ said Sachin Menon, national head, indirect tax, KPMG.

The centralised tax, the GST, would 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. So, goods manufactured in an area where there is a tax holiday, if sold in another state the GST would be collected there. 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 automobile companies.

Like in a recent case, Gujarat government had given some tax incentives to Tata Motors for an investment. Due to the GST, Tata Motors is set to lose out on that. Replying to an email about the Sanand plant and the tax incentive Tata Motors said, “While we are analysing the details of impact on the company , we welcome the passage of the forward looking reform, which will augur well in the long term for uniform economic progress across the country .“

Other automobile companies as well as FMCG majors like HUL and P&G could also be impacted by this.

There is also a view that the central government can tweak the current GST framework and allow some tax credit to a company if the company has invested in a notified backward area. “The problem with this is, the chain (of taxation) is broken and this could lead to a lot of problems later on,“ said a person in the know.

The Economic Times New Delhi,08th August 2016