The budgetary support of the central government scheme introduced last October is not commensurate to the 100% central excise refund that was promised and was being given and has led to significant erosion of investor confidence in these states.

Government policies that reverse gears and do not provide a robust, transparent and predictable investment climate is certainly the death knell to economic development and progress of the North-East.

July 1, 2017 was a watershed moment — the Goods and Service Tax (GST) was implemented in the country. Central excise duty along with 16 other taxes were subsumed under GST and excise duty exemption were rescinded in terms of the decision of the GST Council.

The GST Council decided during a meeting on September 30, 2016 that all entities exempted from payment of indirect tax, including central excise duty, under any existing tax incentive scheme shall pay tax in the GST regime. However, the state concerned or the central government could continue with any such scheme, and in the event of a decision to continue any of such scheme, it shall be administered by way of a reimbursement mechanism. One such unexpected negative fallout was the immediate withdrawal 100% refund of central excise duties given to certain industrial units under North East Industrial and Investment Promotion Policy (NEIIPP), 2007.

Investors Left in the Lurch

On October 5, 2017, the central government introduced a new scheme of budgetary support to those units that were eligible for and were availing the excise duty exemption under NEIIPP immediately before July 1, 2017. The central government now provides the sum-total of the central share of the cash component of Central GST (58%) and Integrated GST (29%) for the residual period of 10 years from the date of the commercial production. However, this is not commensurate to the 100% central excise refund that was promised and was being given and has led to significant erosion of investor confidence in these states.

The central government had first implemented North East Investment Policy (NEIP) in 1997 and then NEIIPP in 2007 and the most recent North East Industrial Development Scheme (NEIDS), 2017 was announced on April 12, 2018. NEIIPP includes fiscal incentives and other concessions for the North Eastern states, including Assam and Sikkim, to promote industrialisation in these states. More specifically, incentives included a Central Capital Investment Subsidy, a Central Interest Subsidy, reimbursement of premium paid towards insurance of fixed capital assets, excise duty exemptions and income tax exemption. A similar package was introduced for Special Category States such as Jammu & Kashmir, Uttarakhand and Himachal Pradesh. The new and existing units with substantial expansion, which commenced commercial production within the 10-year period from the date of notification of NEIIPP (April 1, 2007), were entitled to the said benefits for the first 10 years after commencement of commercial production.

Notwithstanding the enormity of challenges and implementation bottlenecks, many investments were made in the north-eastern region. As many as 4,284 industrial units are estimated to have been established/substantially expanded under NEIIPP and they were eligible for excise duty exemption. In Sikkim alone, as many as 22 pharmaceutical companies set up manufacturing units with an investment of over $400 million.

NEIIPP had played a major role in attracting investment in the north-eastern region and special category states. It is the single largest contributor to employment in the north-east region outside agriculture, which generated nearly 50,000 direct jobs and 2,00,000 indirect jobs.

Realising the hardships to the eligible units on this count, the Jammu and Kashmir government provides reimbursement of 42% of the Central GST and the entire state GST with effect from July 2017. Assam also provides reimbursement of 100% of the State GST with effect from July 2017. However, other states do not yet provide any budgetary support leaving these units high and dry.

Flip-Flop Policy Shifts

It is important to state here that there was surprising flip-flop in the central government’s policy in respect of NEIIPP. With effect from December 1, 2014 DIPP suspended fresh registration of otherwise eligible industrial units. The Federation of Industry and Commerce of North Eastern Region’ (FINER) challenged this decision before the Gauhati High Court and on December 7, 2015, the court directed the registration of the eligible members of the petitioner’s association as an interim measure. However, the central government took an entire year to enable this implementation.

On November 22, 2016, a revised NEIPP was notified whereby registration of industrial units was resumed but included fewer incentives than in NEIIPP 2007. For example, capital investment subsidy under NEIIPP 2007 was 30% of the investment in plant and machinery without any cap whereas the same incentive under the revised NEIIPP 2007 was limited to Rs 5 crore for units operating in the manufacturing sector and Rs 3 crore for units in the services sector.

Interestingly, the Union finance ministry clarified on December 2, 2015 that as excise duty exemption notification dated April 25, 2007 did not mandate registration under NEIIPP, eligible units will continue to avail the excise duty.

The NEIDS 2017 too included fewer incentives than NEIIPP 2007. Capital investment subsidy under NEIIPP 2007 was given at the rate 30% of the investment in plant and machinery without any cap. However, NEIDS 2017 put a cap of Rs 5 crore on the incentive amount of capital investment subsidy, which was christened as Central Capital Investment Incentive for Access to Credit (CCIIAC).

Likewise, the application and extent of Transport Incentive (TI) under NEIDS 2017 is reduced. Now TI is applicable only to transportation of finished goods, that too at a reduced rate of 20% of the cost of transportation by rail and thorough the Inland Waterways Authority. In the case of perishable goods, it is 33% of cost of transportation of air freight. Whereas TI under NEIIPP, 2007 was available for transportation of both raw material and finished goods, at the rate of 90% of the transport cost.

As mentioned above, the North East still lags behind in industrialisation. It has its share of significant challenges. Government policies that reverse gears and do not provide a robust, transparent and predictable investment climate is certainly the death knell to economic development and progress of the region.

Krishna Sarma is managing partner and KR Jayakrishnan is partner at Corporate Law Group.

First Published:May 23, 2018 12:47 PM IST