FMCG suppliers move court as sops go missing in tax exempted zones

 FMCG suppliers move court as sops go missing in tax exempted zones

Suppliers to major FMCG companies that were given tax exemptions for investing in industrially marginal areas of Uttarakhand, J&K, Himachal Pradesh and the North East have dragged the government to court over the apparent lack of such concessions in the Goods and Services Tax (GST). 

Under the erstwhile tax regime, manufacturers who would invest in some areas would get indirect tax exemptions from the state governments – and sometimes from the central government. The idea was to encourage more investments in these exempted zones. In the past few years, India’s top FMCG companies such as Hindustan UnileverBSE 0.29 % and Godrej ConsumerBSE -0.99 % have been sourcing most of their products from manufacturers in these areas. 

In the writ petition filed in Uttarakhand High Court’s Nainital bench, the vendors said that under GST there is no clarity of what would happen to the exemptions given under the earlier regime. Under the transitional credit rules, these manufactures have not been able to claim credit of the past taxes paid or exemptions availed to set off their current GST liabilities. “The Indian Constitution provides that GST Council shall make recommendations with respect to special exempted units. 

The denial of credit on capital goods… in these cases appears to be an unintended omission as section 140 of the CGST Act doesn’t cover the proportionate availing of credit”, said Abhishek A Rastogi, partner, Khaitan & Co, and an advocate for the manufacturers. Tax experts point out that the issue is with respect to non-availability of credit on capital goods when the businesses transitioned from the exempted regime to the taxable regime under GST. 

The impact is huge for capital intensive units which had invested in capital goods in the area-based exempted zones, say people in the know. Tax experts say that there is a discrepancy between the GST Act and transitional credit rules. While the act allows for such credits, the rules deny that. This has caused cost escalation and ambiguity for several manufacturers. 

“The prescribed framework for transition of tax credits from the old regime to the GST regime has unintentional gaps. It is important that the government creates an institutional set up to identify, transparently debate and aggressively plug these gaps,” said Uday Pimprikar, partner, tax and regulatory services, EY India. ET had first reported that GST could cause huge problems for manufacturers in areas such as Baddi in Himachal Pradesh. 

“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,” a senior government official had told ET. 

The Economics Times, New Delhi, 16th March 2018