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Investment subsidy by State Govt. - Whether excise duty is payable

Arbind Aggarwal 
on 01 December 2016

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State governments offer incentives for setting up industries in the Backward regions and generating employment.

The eligible amount of subsidy is determined and capped as per capital invested and employment generated by a unit.

The subsidy to be granted is determined also on the basis of VAT/CST deposited. For example the unit has to charge and pay the due tax to the State i.e. total tax liability - input tax credit = tax deposited. Subsidy amount would be say 50% of the tax deposited and will certainly differ each time as the input tax credit may be higher or lower.

The amount of subsidy is disbursed through "certificate" which can be used for discharging VAT liability in the State.

Excise department want to tax this amount treating as "tax not paid" and or "tax collected and retained". They are simply disregarding the "transaction value" and section 4 of the Central Excise Act which clearly says that the "tax actually paid" is to be excluded.

Invoice issued today. VAT will be paid on due date and that too after adjusting input tax credit. Later on subsidy will be granted after few more months. Now how the assessee could link this subsidy to a particular invoice or the goods in the invoice. Since excise duty is a tax on manufacture of goods, therefore, the price of goods is the basis of charging excise duty. The subsidy granted much after removal of goods are clearly/practically impossible to be linked to a particular invoice/goods.

Duty is payable at the time of removal on transaction value. Transaction value the consideration flowing from buyer to seller in connection with the sale. AT the time of removal excise duty has been paid on the value excluding the sales tax payable/paid.

No amount of sales tax is retained by the assessee at the time or after removal of goods. Subsidy granted later on is an incentive and not a consideration for goods sold and excise duty cannot be levied.

Subsidy is not a VAT refund :- VAT collected on the sales invoice is paid to the VAT department. There is no refund of VAT paid amount from the VAT department & neither the VAT department has determined any remission or retention of VAT liability on the individual sales invoices. The receipt of subsidy is from the office of Department of Industries. As a matter of procedural guideline, the amount and time of receiving incentive is linked to payment of VAT .

Subsidy is not received from the buyer :-Subsidy is received from the State Government. The subsidy is not linked to the buyer. It is not paid on behalf of any individual buyer or entity. It cannot be said that the subsidy given by the Government to the manufacturer is part of the consideration flowing from the buyer to the manufacturer. The subsidy paid by the Government to the manufacturer is in larger public interest and not for benefiting any individual manufacturer-seller. 

In case of fertilizer suppliers, fertilizers are sold to buyers at price less than MRP. The difference between MRP value and sales Value is received as subsidy from the central government to the seller. The excise department sought to tax this subsidy. However, circular dated 10.7.2014 has been issued clarifying that the said subsidy amount is not chargeable to excise duty. The subsidy is not linked to the buyer and it cannot be said that the subsidy given by the Government to the manufacturer is part of the consideration flowing from the buyer to the manufacturer. The subsidy paid by the Government to the manufacturer is in larger public interest and not for benefiting any individual manufacturer-seller and it is also not paid on behalf of any individual buyer or entity. In view of the above, it can be concluded that the subsidy component is not an additional consideration and hence, the MRP at which the fertilizer is sold to buyers by the manufacturers is the sole consideration for its sale. Even though the subsidy component has money value, it cannot be considered as an additional extra-commercial consideration flowing from the buyer to the seller.

CBEC is quoting the decision in case of Commnr. Of Central Excise, Jaipur vs M/S. Super Synotex (India) Ltd. & dated 28 February, 2014. But this decision is not applicable for all cases of investment subsidy. The law laid down in this decision has clearly mentioned that the "tax actually" paid is to be excluded. Therefore, where the amount of tax liability has been deposited/paid either in cash or though input tax credit or subsidy certificate or combination of all three mode of payment, the tax is stands paid to the State and no portion of sales tax can be alleged to have been retained. 

There is no justification in issuing notices and demanding excise duty on the sales tax paid. 


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