Bala ji Consultancy

A handset lobby body has warned the government of a risk of losing Rs 10,000-15,000 crore of future investments in mobile manufacturing, if the system of state incentives is not revived in some manner under the goods and services tax regime. In a recent letter to cabinet secretary Pradeep Kumar Sinha and Niti Aayog vice chairman Rajeev Kumar, the Indian Cellular Association (ICA) said the incentives for local manufacturing has virtually collapsed after the introduction of GST, and urged the government to “honour its commitments” to support the Make in India programme.

ICA chairman Pankaj Mohindroo said the transition from VAT to GST created an unintended, but serious, issue which is hurting the image of India as a whole and state governments in particular on living up to commitments, and impacting future investments because of lack of clarity on rules. The body termed mobile phones and components as the champion sector in ‘Make in India’, with more than 120 plants mushroomed in the last three years, encouraged by policies to boost local manufacturing. If things go as per plans under the phased manufacturing programme, some Rs22,000-23,000 crore more of investments are expected in the next three years. Almost 90% of all handsets currently sold in India are locally manufactured, according to Counterpoint Research.

Outlining the issue, the ICA said in the earlier VAT system, state governments could incentivise manufacturing under which they had powers of levy, exemption and disbursement of VAT revenue as incentives. But under GST, this is not possible since there is only one common law to be followed by both the central and state governments.

To attract investments, most state governments were offering VAT reimbursements primarily linked to fixed capital investments, or reimbursement commitments for 5-7 years. Central sales tax was also usually a part of this incentive. Under GST, an SGST refund mechanism was mentioned as an alternative and successor to VAT refund. The ICA, however, said now the actual SGST payment has become nil because most of the transactions are taking place in the IGST mode and raw material or input purchases are either imports or from outside the state.

Moreover, the IGST rates are further inverted in many cases — for example battery packs are at 28% against the final product of 12%, it said, adding: “This makes the case even worse.” “Now, it’s a no man’s land situation. The Centre is saying that it’s a state government issue, while states say it (inability to give incentives) is because of GST,” Mohindroo said.

The lobby body, in its short-term recommendations to the GST Council to resolve the matter, asked for an exemption for import and domestic IGST on electronic manufacturing only for components/inputs under the actual utilisation condition. Such a move, the ICA said, will not entail any revenue loss to the government but will ease the cash flow situation for actual manufacturing and will re-energize SGST reimbursements without any associated problems. “What will emerge in this situation will be that actual SGST payments will start getting made in cash and eventually the reimbursement issue will somewhat get sorted out.”

The ICA has also urged state governments to refund the portion of the incentives which may have accrued, based on the VAT rate and theoretical calculation till the authorities arrive at a clear policy for the future. “We would request you and all the major states to take the matter up very urgently and resolve the same for the period 1-7-2017 when GST was introduced till date and also arrive at a final solution for the future. This will redeem India’s image,” Mohindroo said.

The Centre may come out with amendments to Special Economic Zones (SEZ) Rules 2006 to synchronise it with Goods and Services Tax (GST) laws by the end of this month, a top official said today.

“We have been working for a few months on the amendment of SEZ Rules, 2006 to synchronise it with the GST laws, this is under active consideration of the government. “With due consultation process with Department of Revenue… this fairly elaborate amendments of the rules is likely to come out now by the end of this month, it is almost at the final stage and we shall be issuing it,” said Bidyut Behari Swain, additional secretary in the Ministry of Commerce at an Assocham conference here.

He also informed that the commerce ministry has created a group of eminent persons to develop a road-map for future of SEZs to have a very fresh look at it and come up with ideas which could be important in the policy making process.

“This group is deliberating today for the second time in this month itself, we really put a lot of hope on this and we feel that the ideas they come up with eventually in another one month or so would really helpful for us in the policy making process,” said Swain.

While the Department of Commerce consistently looks at facilitating ease of doing business by removing bottlenecks wherever they exist, it was observed that there is a possibility of different authorities handling administrative and financial matters being at slight variance with each other.

“We have taken up a project in which we would like to have a very clear set of guidelines regarding how administrative and financial matters by the authorities are carried out and we are hopeful that we will come out with a report in two months which should be implemented in three months,” Swain said.

The GST Council has pruned the 28 per cent slab by cutting tax rates on 191 goods over the last one year, leaving just 35 items, including AC, digital camera, video recorders, dishwashing machine and automobiles, in the highest tax bracket.

There were around 226 goods in the 28 per cent category when Goods and Services Tax (GST) was implemented on July 1, 2017.

Over the last one year, the Council, chaired by Union Finance Minister and comprising state ministers, has slashed rates in 191 items.

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The 35 goods, which will be left in highest slab once the new GST rates are implemented from July 27, also include cement, automobile parts, tyres, automobile equipments, motor vehicles. yachts, aircrafts, aerated drinks, betting and demerit items like to***co, cigarette and pan masala.

Experts said going forward as the revenues stabilise, the Council may look at further rationalisation of the 28 per cent slab, to restrict the highest tax slab to super luxury and sin goods.

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Deloitte India Partner M S Mani said it would be logical to expect that once the GST collections after the recent reductions stabilise, the remaining items such as televisions of all sizes, dishwashers, digital cameras, air conditioners could be considered for an 18 per cent rate.

"It would be ideal if only demerit goods are retained in the 28 per cent slab so that a gradual movement towards having fewer GST slabs can be initiated," Mani said.

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After the latest rounds of rate cuts by the GST Council on July 21, only 35 items are left in the 28 per cent tax slab, an official said.

The Council brought down tax rates to 18 per cent from 28 per cent on 15 items, including vacuum cleaners, washing maching, 68 cm (27 inch) TV, fridge, laundry machines, paints and varnishes.

"The rate cuts would lead to a revenue loss of about Rs 60 billion," the official said.

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The official, however, said that the revenue loss would be only notional as increased consumption and compliance would lead to more revenues to the exchequer.

EY Partner Abhishek Jain said: "The reduction of GST rates from 28 per cent to 18 per cent shows that directionally, the Government seems to be clear that the 28 per cent rate should be restricted to super luxury and sin goods".