To increase the share of industrial sector in the country’s economy, from the current 27.6%[1], the government had adopted the policies of ‘Atmanirbhar Bharat’ and ‘Make in India’ and in line with such policies launched the Production Linked Incentive Scheme (“PLI” or “PLI Scheme”) in 2020. Currently expanded to 14 sectors, the purpose of PLI is to attract investments in key priority sectors and, ensure efficiency in the manufacturing and make Indian manufacturing globally competitive[2].
Simultaneously, Goods and Services Tax (GST) was going through its nascent stage, being touted as One Nation One Tax, by reducing the compliance burden and removing the cascading effect of multiple taxes.
Now that both GST and PLI have reached certain maturity, the time is right to analyse how changes in the GST regime can enhance the effectiveness of the PLI Scheme.
To boost manufacturing, the government seeks to create an ecosystem which, firstly facilitates swift setting up of new manufacturing units and secondly makes the business of such manufacturing units economically viable.
For the first step, the setting up of new units can be encouraged with efficiencies in the government regulatory processes, for instance, single window for essential regulatory licences, availability of industrial plots, state incentives and availability of multi-modal logistics.
For the next stage, the focus should be on improving the demand-supply factors and the mechanism of levy of taxes and duties. The supply and demand should be made conducive to domestic production, to the extent of imposing trade barriers like anti-dumping duty or other quantitative barriers, if necessary. GST being a transaction-based tax can create much more hiccups for the businesses and require immediate attention but if used effectively, the meticulous GST regime can facilitate PLI schemes. Additionally, the plans of the present government to overhaul the Income-tax Act, 1961 also provides a unique opportunity to consider PLI while framing the direct tax provisions.
In this article, we will focus on identifying the friction points in the current GST regime that can be tweaked or reshaped to create synergies with the PLI Schemes.
A manufacturing unit constructs structures to carry out its operations: production, warehousing etc. Hence, a common but necessary expense, whether in a green field project or a brown field project, is land acquisition and subsequent construction on it. While there is no levy of GST on sale of land[3], the credit of such inward works contract service or any other goods or services for construction of a building is blocked under Section 17(5) of the Central Goods and Services Act, 2017 (“the CGST Act”). In its recent judgment, the Hon’ble Supreme Court[4]has provided a small window for an assessee to avail the credit if the building can be proved to be “plant”, based on the functionality test[5]. This creates a huge financial burden on the manufacturers at the initial stage of investment itself. Additionally, the PLI scheme does not take into consideration the expenditure on land and building and taxes paid thereon to calculate the ‘investment’ or incentive. As a result, the cash flow of the manufacturing unit is affected and even the PLI scheme does not provide any relief.
The figure of blocked ITC is already filled in GSTR 3B on the GST portal. The GST portal and PLI claim can be synchronised for the data to be available directly for PLI application/claim. Based on that the PLI applicant should get benefit either to meet threshold investment limits or addition to the incremental sales for incentive. The reason for non-inclusion might be to prevent the abuse of money speculated in land / non-productive asset for PLI benefit. However, once it is established that the manufacturing unit is using the building and land for production then ignoring this huge liability will go contrary to the desired goals of PLI scheme.
Under the PLI scheme, the applicants have to first submit an ‘application for eligibility’ and then periodically submit ‘disbursement claims’, both to the Project Monitoring Agency (“PMA”). The disbursement claims are primarily based on the statutory audited balance sheets and returns filed under various laws but are also based on other documents like CA certificate, CS Certificate etc., wherever required. The disbursements claim brings out the ‘incremental sales of manufactured goods’.
Here the hands of the PMA are however not tied to accept the claims mechanically. To verify the claim amount it may examine other documents. Except two sectors, the respective ministries have appointed IFCI Limited as the PMA. IFCI, being a Systematically Important Non-Deposit Taking Non-Banking Finance Company, established in 1948, can be expected to have expertise to exercise such function satisfactorily.
It is worth noting that, GST also contains valuation provisions, and the proper officer may issue show cause notice[6] to dispute the valuation of the supply. In case of a PLI beneficiary/applicant, the GST officers should avoid raising valuation dispute. Firstly, it will be frustrating for a manufacturer to justify his valuation on two fronts for the same goods. Secondly, dispute on identical issue by GST department should not become the basis to seek refund of any PLI claim disbursed. Thirdly, in case of confiscation of goods[7], the GST department may impose fine upto the extent of market value of the goods. Seven years of experience has shown that orders under GST are often passed with impunity, disregarding the detailed submissions of the assessee. It is suggested that the CBIC[8] may issue instructions/circular to the department to exercise restraint and application of mind before raising a valuation dispute against a PLI beneficiary. Prior consideration should have to be made to the valuation settled and accepted at the PLI desk. Otherwise, it would amount to tax terrorism and would derail the PLI Scheme.
Though GST was enacted with the object of removing multiple taxation systems in the country and to avoid cascading effect[9], there are still a lot of levies and duties which have not been aligned with such objects.
Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel have been kept out of the purview of GST[10] and VAT is levied on sale of these products.. Such fuels are used for transportation as well as in operation of machinery. Additionally, there is also levy of state excise duty on liquor/alcohol which has industrial application. These are major day-to-day expenses for any manufacturing plant and no set off is allowed of such taxes and duties and hence become part of the cost of business. The PLI schemes consider such non-creditable taxes and duties paid on plant and machinery as part of the “investment” for verifying the eligibility, but these are not factored in during the disbursement of claims. To stay competitive, all these non-creditable levies incurred on operations may not always be added to the cost of goods. PLI scheme should also allow addition of such levies to the claim amount, otherwise such mounting expenses can affect the cash flow of manufacturers. One way to implement this could be the reflection of the amount paid as duties, VAT etc. on the GST portal. Both centre and states are already connected on the nationwide portal of GST and often the same department, at state level, levies GST and VAT/Sales tax.
Most of the plant and machinery required for manufacturing are classified under Chapter 85 and 98 of the HSN. Classification under GST is also based on the same system of classification. Most of the goods belonging to such chapters are taxed at a high rate of 18%[11].
While the credit of the ITC on such capital goods may be available under GST, this will further add up to the initial costs of the manufacturer, in addition to the costs associated with land and building. PLI scheme counts non-creditable levies in ‘investment’ but GST paid will not be added to prove eligibility. The Government may issue a notification that new or expanding manufacturing units under the PLI scheme shall be eligible to purchase such machinery at a lower rate of 5% or 12%. This will be in line with the long-standing need of rationalisation of GST rates. In such cases, the suppliers will also be eligible for refund, if faced with an inverted duty payment[12].
Before starting operations, a business has to obtain various approvals ranging from labour laws, environmental law, shops and establishment law, registration under GST, obtaining PAN card, industrial laws, etc. These laws are at different levels of our federal structure: national, state and municipal. The issues faced here are (i) registration on multiple government department portals/offices; and (ii) lack of time limit on the department to approve or reject the application.
Getting GST registration is an absolute necessity for any business. Along the lines of cooperative federalism, governments should develop GST portal into a single window for obtaining all the relevant approvals. GST registration already records the core business of the person: ‘Manufacturer’, ‘Trader’ or ‘Service Provider and Others’. It also contains annual turnover data in Table 5 of GSTR 9C. So, the option to apply for PLI scheme can be enabled on the GST portal. Such a system would be far more effective if there was a single point of interaction with the government: from application to issuance of approval. The Central Government has already launched the National Single Window System (NSWS) in September 2021 however this platform has some shortcomings: (i) it is an advisory tool to identify approvals based on user input and is to be used for guidance purpose only[13]; (ii) the applications for which it does accept approvals are forwarded to the respective ministries/departments[14].
Directorate General of GST Intelligence (“DGGI”) has been demanding GST on based on reverse charge mechanism (RCM) from the businesses who have obtained a statutory approval from government / governmental authorities / government bodies. The government also omitted a slew of exemptions under the Notification No. 12/2017-CT(R)[15] to enable this. Additionally, GST considers activity of the Central Government, State Government or any local authority in which they are engaged as public authorities to be “business”[16].
Calculating the taxable value in such transactions and the time and method to discharge such liability is itself a complex exercise. There are no guidelines for the department in this regard. Even though the payment of GST under RCM on such services may be revenue neutral, this will heavily impact the cash flow of the business as on date.
The government may allow exemption on governmental approvals for manufacturers who have received acknowledgment of receipt of application from the PMA. The GST may become payable if the application is not finally accepted.
When a foreign company invests in India, it often relies upon its parent company for technical know-how, seconded employees and other intellectual property like brand name. The DGGI frequently raises demand of RCM liability on such Indian entities alleging import of services. Recently such demands have been raised on Infosys and domestic arm of various airlines.
This issue in particular highlights the disconnect within the department itself because CBIC has already issued Circular No. 210/4/2024-GST dated 26.06.2024 which provided that under Rule 28 of the CGST Rules when the foreign affiliate provided certain services to the related domestic entity, then the value of such services may be deemed to be Nil.
However, despite such circular, the DGGI continues to issue notices on this point on the ground that one of the two conditions to avail this circular is not fulfilled: full ITC is not available to the related domestic entity to whom notice has been issue. Further, the ad hoc style adopted by CBIC, specially to solve the issue of invoices reflects poorly on the domestic tax regime. GST Council had the opportunity to conclusively clarify the meaning of ‘full credit’ in Circular 210. The GST Council rather limited itself to exempting the import of certain services by the airlines from foreign related parties[17] and then the CBIC issued two circulars[18] on the same issue.
As a result, the disputed issue still stands open for action by the department creating apprehensions in the minds of PLI investors who are expected to invest millions in manufacturing.
In January 2022, the Prime Minister in his speech at the World Economic Forum, Davos Summit, announced that India is moving ahead with the spirit of Make in India, Make for the world[19]. Full realisation of this dream would involve not just capacity building but also competitive pricing. Delay or denial of refund increases the tax burden on the exporter-manufacturer. If the value of the export goods increases and are not sold as a result, the purpose of reimbursing the cost of eligible products under PLI schemes would be defeated.
For refund, CGST Rules contains two provisions: Rules 89 (refund of unutilised credit when exports made ‘under Letter of Undertaking’) and Rule 96 (rebate of on exports are made ‘with payment of IGST’).
Both Rule 96(10) and Rule 89(4A)/(4B) contained restricts as to refund for beneficiaries of schemes like advance authorisation. These provisions were amended multiple times and were bitterly contested by the government even upto the Supreme Court. Due to this, legitimate refund claims were withheld and sometimes even adjusted against arbitrarily tax demand without any notice. Finally based on the recommendation of the 54th GST Council Meeting, these provisions were finally deleted from the CGST Rules on 08.10.2024. However, the issue still stands alive for the period prior to such omission. Further, Rule 89 limits the turnover of zero-rated supply of goods to be maximum of 1.5 times the value of like goods domestically supplied by the same or, similarly placed supplier. While this provision has already been held to be unconstitutional by a High Court,[20] it continues to be in the statute creating a legal uncertainty.
If a PLI beneficiary relies upon this decision and later it is overruled by the Supreme Court, it may be vulnerable to demand of refund of incentives disbursed to it.
To get the desired results from the PLI schemes it is imperative that the government broadens their vision and PLI should not be limited to incentives but should create an incentive ecosystem, ultimately reducing the costs and increasing the production. Taxes paid by businesses are a massive cost to the business. Tax mechanisms should be intertwined with the PLI in such a way that frictions like cascading, non-availability of credit, multiple compliance windows etc. reduce the tax burden. Unpredictable tax position and compliances discourage investors, and the capital flees to other jurisdictions. It is apposite that compliances in PLI and GST are aligned and at the earliest PMA considers adopting the turnover / valuation, registration, forms etc. as per the GST framework.
[1] As share of overall GVA at current prices as per Economic Survey 2023-24
[2] Press Note dated 02.08.2023 of Ministry of Commerce & Industry
[3] Sr. No. 5 of Schedule III of the CGST Act, 2017
[4] Chief Commissioner Of Central Goods and Service Tax vs. M/s Safari Retreats Private Limited [TS-622-SC-2024-GST]
[5] Para 52 of Safari Retreats (supra): “This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance.”
[6] Section 73/74 of the CGST Act or Section 74A for supply pertaining to FY 2024-25 or later.
[7] Section 130 of the CGST Act.
[8] Central Board of Indirect Taxes & Customs.
[9] Statement of Objects and Reasons (CGST Bill, 2017).
[10] Section 9(2) of the CGST Act.
[11] Schedule III of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017
[12] Circular No. 173/05/2022-GST
[13] https://www.nsws.gov.in/about-us
[14] https://www.nsws.gov.in/faqs
[15] Partial omissions from Sr. No. 6 and complete omission of Sr. Nos. 26, 32, 33, 47A and 51
[16] Section 2(17)(i) of the CGST Act.
[17] Sr. No. 10L – Notification No. 08/2024-Integrated Tax (Rate) dated 08.10.2024
[18] Circular No.234/28/2024-GST and Circular No.236/30/2024-GST both dated 11.10.2024
[19] Press Information Bureau, Delhi, ‘English translation of PM's 'State of the World' address at World Economic Forum's Davos Summit’ dated 17.01.2022.
[20] Tonbo Imaging India vs. Union of India 2023 (4) TMI 46 – Karnataka High Court.