Proposal to refund central GST on goods made in excise-free zones to help auto, FMCG and pharma companies

NEW DELHI: A proposal to refund central goods and services tax (GST) on items made in formerly excise-free zones in Himachal Pradesh, Uttarakhand and the North-East is set to be presented to cabinet. The move will benefit companies such as CiplaBSE -0.97 %, Dabur, Dr Reddy’s and TVS MotorBSE -0.68 % that invested in those areas because of the tax break.

Such exemptions have largely been scrapped under GST as part of efforts to create a common market across India with as few interstate variations as possible.

The Expenditure Finance Committee (EFC) has approved the scheme, which is likely to benefit a number of automobile, fast-moving consumer goods (FMCG) and pharmaceutical companies that have invested in these zones.

“EFC has cleared the scheme,” a senior finance ministry official told ET. It will shortly be introduced in the cabinet, he said.

Hundreds of pharmaceutical companies including high-profile ones such as Cipla, Dabur, Dr Reddy’s, Johnson & Johnson and Wockhardt have plants in such zones in Himachal Pradesh. TVS Motor, Lloyd Electric, TAFE and other automobile component makers also have units in the state.

Many companies in the cement sector have plants in such zones in the North-East. Department of Industrial Policy and Promotion, which anchors the scheme, will move the proposal for cabinet consideration.

The much-awaited plan provides for refund of 58% of central GST paid by manufacturers in the erstwhile excise-free zones of Himachal Pradesh, Uttarakhand and the North-East. States are yet to take a call on their portion of the levy or state GST. Refunds will be worked out after adjusting for input tax credit due, said the official cited above.

Most exemptions have been scrapped under the GST regime barring some essential goods but the government decided to grandfather the excise exemption for special category states to ensure a smooth transition.

Industry had expected the rollout of the scheme along with GST, but the plan wasn’t ready at the time. “It would be in place before the first payment of GST becomes due,” said a government official.

Companies have to pay GST by August 20 after which they can file refund claims. Industry will have to seek refunds in line with detailed guidelines for the new scheme. Tax experts sought a mechanism that provides complete tax benefit.

“Companies that have invested in area-based exemption zones are eagerly waiting to know the mechanism by which the refunds will be granted along with the time lines,” said Anita Rastogi, partner, PwC. “It is critical that the benefit in whole is available.”

GST, which was put in place on July 1, replaced 17 central and state taxes besides 23 cesses.