Contributed by: Khaitan & Co
Manufacturing, telecom and mining are three of the most critical sectors as far as the Indian economy is concerned – deservedly, these sectors often find priority in the economic policy making by the Government of India.
In that backdrop, the amendment proposed in the Union Budget 2021 (Budget) in Section 8(3)(b) of the Central Sales Tax Act, 1956 (CST Act) comes as a surprise. An unpleasant surprise, since this can drive up the input tax costs of many businesses especially in manufacturing, telecom and mining sectors.
Section 8 of the CST Act provides for ‘Rates of tax on sales in the course of inter-State trade or commerce’. Section 8(1) and 8(2) provide for a concessional CST rate of 2% on inter-state sales of goods for specified end-uses as described in sub-section 8(3), subject to submission of Form C (as per Section 8(4) and the CST Rules). For end-uses not falling under sub-section 8(3), simply put, CST is leviable at a rate equal to the VAT rate applicable to the sale/purchase of the goods in question under the VAT laws of the seller’s State (which is usually much higher than 2%).
After implementation of GST in 2017, CST Act applies only to non-GST goods like petrol, diesel, crude, natural gas, aviation turbine fuel (ATF) etc. Several businesses in manufacturing, telecom and mining sectors which have heavy consumption of petrol/diesel/natural gas etc have been availing the benefit of concessional CST rate of 2% (through Form C) on their input side.
Many favourable judgments were issued by High Courts across India, post introduction of GST, upholding the continued eligibility of Form C and the consequent concessional CST rate. In most of these cases, the High Courts relied upon the language of Section 8(3)(b) of the CST Act to sustain continued eligibility for Form C and resultant concessional CST rate of 2% even post GST for eligible end-uses. The proposed amendment, it appears, seeks to overturn these judgements.
The amendment proposed in the Budget 2021 in sub-clause (b) of Section 8(3), in essence, significantly curtails the scope of end-uses eligible for this concessional rate of 2% with effect from 1 July 2021. Accordingly, purchase of non-GST goods for the following end-uses is being proposed to be disentitled from the benefit of Form C and resultant concessional CST rate of 2%:
purchases for usage in telecommunication network (this would include diesel used for generator sets in telecom towers);
purchases for usage in mining;
purchases for usage in generation or distribution of electricity or any other form of power; and
purchases for usage in manufacture or processing of goods (other than manufacture or processing for sale of non-GST goods).
As mentioned above, businesses in manufacturing, telecom and mining sectors which have heavy consumption of petrol/diesel/natural gas etc have been availing the benefit of concessional CST rate of 2% (through Form C) on their input side – once this amendment is in force, these businesses will have to bear CST at rates varying from 15 to 31% (or more, depending on State to State) instead of 2% and thus be forced to re-work their product pricing by factoring in such enhanced input tax costs. The ability to pass on such enhanced input tax cost completely, in the current economic scenario, is also doubtful.
Even in the power generation sector, this will be a blow for the gas-based power generation facilities which have anyway been struggling for years since tax cost on purchase of natural gas will go up significantly.
In some cases, this may also lead to contractual disputes arising out of interpretation of ‘change in law’ clauses in relevant contracts.
At a sensitive time like this for the Indian economy, when these priority sectors would have been looking up to the Government for support, this proposed amendment seems counter-intuitive – representations are being filed seeking a roll-back of this proposal.
If such a roll-back is not possible, the Government should strongly consider expediting the timeline for the long pending inclusion of these non-GST products into the GST fold – that way, input GST cost on such petroleum products is likely to become creditable in the hands of such businesses in manufacturing, telecom and mining sectors and thus no longer remain an input tax cost.
Contributed by Khaitan & Co
The views of the authors in this article are personal and do not constitute legal / professional advice of Khaitan & Co. For any further queries or follow up please contact us at firstname.lastname@example.org.
The above article is authored by Sudipta Bhattacharjee (Partner) and Onkar Sharma (Principal Associate).