One of the important, or rather critical areas which would get impacted under GST is the tax incentives granted by state governments to companies making investments in the respective states.
Such benefits are offered by State Governments under industrial promotion schemes. In Maharashtra these are more commonly known as the Package Scheme of Incentives (PSI) . The main purpose of such incentives is to attract investments in the State for industrial development and to promote employment generation.
PSI benefits are generally granted by states as subsidies based on the quantum of taxes paid (i.e. VAT and CST) by companies to the State Government on their manufacturing activities and that too, over a specified time period. Of course, such incentives are subject to a maximum ceiling limit based on total capital investments made by these companies. Since the amount of incentives are based on the amount of indirect taxes paid to the State Government, it is important to analyse how these incentives would get impacted under the GST scenario. Analysis done by us for some of our clients show that PSI benefits are substantially impacted in all the sampled cases.
In GST, the picture changes dramatically. There would a two-fold impact on the quantum of incentives – one, inter-state sales would not contribute to the incentives under GST and two, the effective tax rate could also be lower. With respect to the tax on inter-state sales, since the tax would accrue to the destination state, the Government of Maharashtra is not likely to give any benefit.
Many companies have made investments after considering the Net Present Value of the cash flows on account of such a subsidy. These calculations would alter substantially in many cases and so could the Internal Rate of Return calculations.
As most of the units would be impacted, it may make more sense to make a joint representation to the Government through a Chamber of Commerce.
Everyone understands that this would be a long exercise. But a small beginning now could help make the difficult road ahead a little easier.
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