GST ambiguity ties up firms’ working capital

With the new goods and services tax (GST), industries in hilly and northeastern states say they face uncertainty on whether they will continue to get full tax benefit for establishing units there. Their overall benefits might get cut by up to 42 per cent. Besides the investment and financial uncertainty on this, their working capital is being blocked, they contend.

Hindustan Unilever, Dabur, Marico, Emami and Berger Paints are among the bigger names with manufacturing facilities in these states. Companies argue that hundreds of crores worth of refunds have been blocked, with no notification yet from the government. Expectedly, the smaller firms are more affected.

Manufacturing units in Uttarakhand, Himachal Pradesh, Jammu & Kashmir and the Northeast had enjoyed full exemption from central excise before the GST rollout. Under the GST, the benefits will come by way of refunds but, it appears, only partly (58 per cent). The Centre has indicated the states must pay their share of what is devolved.

“Lack of clarity on the areabased exemption is causing uncertainty and severely impacting working capital. It is extremely important that the notification giving necessary clarity on quantum and procedures is issued at the earliest,” said Lalit Malik, chief financial officer (CFO) at Dabur.

The department of industrial policy and promotion (DIPP), asked to draft the policy and guidelines on the refund mechanism, is to notify anything, though GST was implemented from July 1. A senior finance ministry official said they are yet to hear from DIPP over the progress on the guidelines for area-based exemption.

“Based on reports, we understand that 58 per cent of CGST liability would be refunded. The industry is awaiting a formal notification," said Vivek Karve, CFO at Marico. Two types of area-based exemption schemes were in operation. While manufacturing units in J&K and the northeast got the excise benefit via refunds, those in Himachal Pradesh and Uttarakhand got outright exemption. The revenue forgone by the Centre was ~19,120 crore in 2015-16.

Pratik Jain of PwC India says it is important that the mechanism of refund does not substantially dilute the amount of earlier benefit, as the latter had led these firms to significantly invest in these states.

“One way would be to provide refunds with reference to the sale price of the brand owners and not the contract manufacturers. Also, the refund has to be granted in a timely manner, to avoid working capital issues,” he said.

The excise exemption for J&K is to expire in 2020 and in the northeast after this year. The exemption is for 10 years. Exemptions for Himachal and Uttarakhand had expired in 2010 but the tax waiver was to continue till 2020 in many cases.

There had been earlier promises, say the companies, that the tax benefit would carry on under the GST regime.

“We seem to have no clue on what amount is to be accrued in the balance sheet, which is impacting our financial health. There is uncertainty over whether we should continue with the setup in the hilly states," said a senior executive from a large chemicals company.

Prior to July 1, the companies enjoyed exemption from the 12.5 per cent excise duty on their notified Maximum Retail Price (MRP), minus the prescribed abatement. Under GST, the tax needs to be paid upfront and later refunded. Companies are concerned whether they will receive the remaining 42 per cent from the states.

Beside, there is no clarity over the valuation to compute a refund, since the MRP-based duty system has been done away with, specifically where goods are manufactured on contract or job work.