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Area-based exemptions and budgetary support scheme: transition to GST
By Narendra Singhvi & Anshul Kumat
Mar 24, 2020

THE introduction of Goods and Services Tax in 2017 was coupled with discontinuation of the area-based exemptions granted under the Central Excise Act, 1944 in States like Jammu and Kashmir, Himachal Pradesh, Uttarakhand, and North-Eastern states including Sikkim.

Vide various notifications issued under the Central Excise Act, 1944, exemptions were granted to eligible units being established/ expanded in the specified states. Based on such promises of exemption, various industrial units were established/ expanded in these states, with the intention to avail benefit of such exemptions. With introduction of GST and power of both Central and State Governments to levy such tax, the aforesaid exemptions were withdrawn. All relevant notifications ceased to apply w.e.f. 01.07.2017 and were rescinded on 18.07.2017 vide Notification No. 21/2017-CE, dated 18.07.2017. This led to a negative impact on the operational capabilities of eligible units.

This invited attention of the GST Council in its second meeting held on 30.09.2016 and it was decided that the decision to grandfather any incentive given to specific industries in existing Industrial Policy of States or through any scheme of Central Government shall remain with the concerned State or Central Government and if the same is continued, it shall be administered only in form of direct transfer of equivalent taxes paid through the budgetary route and not by way of refund.

Based on the GST council recommendations, on 05.10.2017, the Union of India notified the Budgetary Support Scheme providing reimbursements of Central Government's share of the cash component of CGST and IGST i.e. 58% of CGST and 29% of IGST, in lieu of exemption provided under the exemption notification.

In Hero Motocorp Limited v. Union of India, 2020-TIOL-530-HC-DEL-GST, the indulgence of Hon'ble Delhi High Court was sought to order the Union of India to grant complete exemption by way of reimbursement of the amount of CGST and IGST for the residual period of exemption notification. Rejecting the prayer, it was held that the rescinding of the exemption benefits is not hit by principle of promissory estoppel, in as much as the Proviso to Section 174(2)(c) of the CGST Act, 2017 specifically bars such claim. It was further held that exemption under the relevant notifications was granted upto a period of ten years and thus, such exemption could well be withdrawn beforehand. Further the Court went into the jurisprudence behind introduction of these exemption benefits and GST and concluded that the decision to grant support rests with the respective governments and does not require any interference by the Court.

This judgment has significant impact on the operational capabilities of the units, working under area-based exemptions earlier. The Court, in its concluding observations, specifically noted that the plea of promissory estoppel is not maintainable, in the absence of any challenge by the Petitioner to the rescission of the said notification which granted exemption or to the vires of the proviso to Section 174 (2) (c) of the CGST Act. These pleas, thus, have not been considered by the Court and, thus, are still to be tested at appropriate forum.

[The views expressed are strictly personal.]