On Friday, in a ruling aimed at preventing the misuse of tax exemptions, the Supreme Court overturned the relief given by the high courts of Gujarat, Guwahati and Sikkim and held that area-based exemptions in the form of tax or duty refunds should be limited to actual manufacturing or value addition.
The judgment favours the Union government’s stance of limiting refund of erstwhile central excise given to units in industrially backward areas such as Kutch (Gujarat) and the north-eastern regions in tax incentive schemes dating back to 2001 and 2007, respectively.
The Apex Court pointed out that tax paid needs to be sanctioned by the Centre only in cases where there is actual manufacturing of goods and not where goods are only manufactured on paper.
This will have a financial impact on industrial units who would have received refunds on a provisional basis following the favorable High Courts orders, experts said.
Experts also suggested that the order may have an impact on exemption or refund mechanism as applicable in the GST (Goods & Services Tax) regime.
The matter pertains to two Central government initiatives to promote industrial activity. One was introduced in 2001 in Kutch, Gujarat, after the devastating earthquake, prescribing 100 per cent excise duty exemption to new industrial units set up prior to July 31, 2003 (extended to December 31, 2005) for a period of five years from date of commencement of commercial production.