Introduction
Under the erstwhile indirect tax regime in India, there were several area-based exemption schemes aimed at promoting industrial growth and economic development in specific geographically disadvantaged or special category states in India. The exemption was typically for a period of 10 years from the date of commencement of commercial production of finished products. This support was crucial for making these industries competitive and fostering employment in these regions.
Recognizing the need to continue supporting these industries that had set up operations based on these long-term incentives, the Government of India, through the Department of Industrial Policy and Promotion (now DPIIT), issued the Scheme of Budgetary Support[1] (‘BSS’) in the GST regime, for eligible manufacturing units in Jammu & Kashmir, Uttarakhand, Himachal Pradesh, and the Northeastern States. This scheme provides for a refund of the central share of Integrated Goods and Services Tax (‘IGST’), and Central Goods and Services Tax (‘CGST’) paid in cash by these units, effectively ensuring the continuity of the benefit provided in the erstwhile regime.
Amount of Budgetary Support (Para 5.1 of BSS)
The BSS states that eligible manufacturing units will receive an amount of budgetary support, which is equal to the sum of 58% of CGST and 29% of IGST paid through the electronic cash ledger.
Verification of Value Addition (Para 5.8 of BSS)
In general sense, value addition means an increase in the value of goods as a result of the manufacturing process undertaken by an eligible manufacturing unit.
Para 5.8 of the BSS has pre-defined the ‘value addition rate’ for specified goods. This para states that if the actual CGST/IGST paid by an eligible unit on their calculated value addition is higher than the CGST/IGST that would have been calculated based on the standard value addition rate specified in the table, then the unit may be taken up for verification.
The scheme further states that for the calculation of the value addition, the procedure specified in Notification No. 01/2010-CE dated 06.02.2010 will apply.
Notification No. 01/2010-C.E., dated 6 February 2010
Under this Notification, the manufacturing units were eligible to claim refund of Central Excise Duty. This refund was determined as a specific percentage of the total duty payable on the manufactured goods, based on pre-defined ‘value addition rates’ enumerated in the notification. The refund was restricted to the portion of duty paid through cash, subsequent to the full utilization of the CENVAT credit.
However, a provision existed for cases where the actual value addition rate achieved by a manufacturer exceeded the prescribed rate. In such instances, manufacturers had an option to apply for the fixation of a 'special rate'. This special rate represented the actual value addition in respect of the goods manufactured and cleared under the notification.
Applicability of Notification 01/2010-C.E. under BSS
Para 5.3 of the BSS states that the limitations, conditions and prohibitions mentioned in the erstwhile exemption notification will continue to apply to the budgetary support granted under the BSS; however, the provision relating to the determination of special rate will not apply to the BSS. This means that the manufacturer has no option to apply for the fixation of the ‘special rate’ for the calculation of the budgetary support amount.
The J&K Cement Corporation decision and its implications
The recent decision of the Jammu & Kashmir & Ladakh High Court in the case of J&K Cement Corporation v. Union of India[2] has led to opening of a pandora’s box regarding the value addition to be adopted for computation of the refund amount under the BSS.
The Hon’ble J&K High Court has held that the benefit under BSS should be restricted to the value addition rates prescribed under the erstwhile Notification No. 01/2010-C.E.. This effectively means that the budgetary support cannot be granted on the basis of the manufacturer’s actual value addition but rather is limited to the value addition derived from the pre-determined rates specified in the erstwhile exemption notification.
It appears that the Hon’ble High Court has not taken into consideration that Para 5.8 of the BSS provides for verification of refund claims filed by eligible units in cases where the CGST/IGST paid on value addition is higher than the CGST/IGST rate provided in the table. At this juncture, reference can be made to Circular No.1060/9/2017-CX dated 27 November 2017 which clarifies that eligible unit submitting application for refund under the BSS shall inter alia indicate the value addition achieved by it in respect of each category of specified goods and where the value addition is higher than the limit provided in the table under Para 5.8, the sanction of the claim shall be after verification of the value addition.
The above Circular providing for sanction of the claim after verification of the unit in case of higher value addition, has not been considered by the Hon’ble J&K High Court.
Conclusion
The ramifications of this decision are significant and may open up a plethora of litigation for units that have been sanctioned refunds at higher value addition rates than the rates prescribed in the table in Para 5.8 of the BSS.
It is pertinent to note that as per Para 7.2 of the BSS, the refund under BSS is sanctioned to a unit only after due examination of the refund applications by the Assistant Commissioner or Deputy Commissioner of Central Taxes, as the case may be. In case the Department relies on the J&K Cement Corporation decision (supra) to initiate recovery of refund proceedings against the units, a question arises as to whether the same amounts to review of the refund order passed in favour of such units.
At this juncture, it is pertinent to refer to Para 9 of Circular No. 1068/1/2019-CX dated 10 January 2019 wherein it was clarified that the support granted under the scheme is in the nature of grant and not refund of duty under taxation law and as such there is no requirement of any appellate forum as the decision of the sanctioning authority is final.
On the other hand, Para 9.1 of the BSS stipulates that the budgetary support allowed is subject to the conditions specified under the scheme and in case of contravention of any provision of the scheme/notification, the budgetary support shall be deemed to have never been allowed and any inadmissible budgetary support reimbursed to the units including the budgetary support paid for the past period under the BSS, shall be recovered along with 15% interest thereon.
Therefore, if the manufacturing unit is aggrieved with the findings of the sanctioning authority, there is no appellate forum for the unit to appeal against the order of the sanctioning authority; however, recovery of the budgetary support granted is permitted under Para 9.1 of the BSS in case of contravention of conditions of the Scheme.
A question arises as to whether there is any contravention of the conditions of the Scheme where refund was granted on higher value addition rates, after due verification, and particularly when the Circular dated 27 November 2017 issued by the CBEC clearly provides that in case of higher value addition, the sanction of the claim shall be done after verification. It is settled law that Circulars are binding on the Department.
It is pertinent to note that the BSS does not provide for any limitation period for the initiation of recovery proceedings in case of contravention of any conditions of the BSS or on obtaining refund based on incorrect particulars. Therefore, there is a possibility that demands are raised against the manufacturing units for all refunds issued since 2017 which are above the prescribed value addition rates. In such cases, the interest burden on the unit shall be cumbersome.
There is an urgent need for clarification in the matter to ensure that the spirit of industrial promotion and ease of doing business in these crucial regions is not inadvertently undermined.
[The first author is an Associate Partner while the other two are Principal Associates, respectively, respectively, in GST practice at Lakshmikumaran & Sridharan Attorneys, Ahmedabad]
[1] Scheme of budgetary support under Goods and Service Tax Regime to the units located in States of Jammu & Kashmir, Uttarakhand, Himachal Pradesh and North-East including Sikkim - F. No. 10(1)/2017-DBA-II/NER dated 5 October 2017.
[2] 2025 (4) TMI 499 – Jammu and Kashmir and Ladakh High Court
