Recent changes in excise exemptions

SERVICE TAX

ocesses from the benefit of excise exemption, under the aforesaid location based notifications. It must be mentioned here that the recent changes to the exemption notifications relating to HP and UK were preceded by similar amendments that were effected to the notifications in force in regard to units located in the North Eastern States, in April 2007.  Thus, between April 2007 and January 2008, the Government has quite deliberately denied the benefit of exemption from excise duty to units which are engaged in carrying out the aforementioned activities/ processes alone and no other. It appears to be the thinking of the Government, that such activities, although amounting to manufacture as per provisions in excise law, are nevertheless, not of adequate economic substance in order to warrant the benefit of a continued exemption from excise duty, notwithstanding that the companies undertaking such activities/processes have invested appropriate amounts of capital in locating their units in these States.  There is, of course, the fundamental point of whether it is appropriate to grant exemption from indirect taxes based on locational considerations. From a tax reform standpoint, exemptions from taxes are, in general, not good practice and certainly not those predicated on locational considerations.  However, the point is whether, given that the location-based exemptions continue to be in place (and to all accounts will remain so even after the introduction of the GST in the year 2010), and given that investments have taken place as a result of such exemptions, it is appropriate for the authorities to amend these exemptions in order to prospectively deny the benefit to economic activities which were earlier eligible for the benefit. This leads us to the point about promissory estoppel.  This article will not go into the legal position on whether or not promissory estoppel is applicable to the situation under reference and whether, in the facts and circumstances of the case, the principle of public policy would overrule the possible challenge on promissory estoppel.  Clearly it is the case today that a large number of companies which had invested in these States, based on the benefit of an excise exemption available as per statute, will now no longer be eligible for the benefit even though there are no underlying changes in their business operations and the economic activities that they carry out in these locations continue unchanged as before.  This is clearly against the canons of taxation as there is no certainty that benefits legitimately and legally due to taxpayers will continue to be available. This is a matter for serious introspection and reflection.  The author is Leader, Indirect Tax Practices, PricewaterhouseCoopers. Views expressed are his own. pwclts.nd@in.pwc.com