Why drive up input tax costs?

By Sudipta Bhattacharjee

The amendment proposed to Section 8(3)(b) of the Central Sales Tax Act, 1956 (CST Act) in the Union Budget FY22 has been a scarcely-commented-upon indirect tax proposal. However, this will be a critical change and will drive up input tax costs of many businesses, especially key sectors like manufacturing, telecom and mining.

After the implementation of GST in 2017, the 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 require significant consumption of petrol, diesel, natural gas and such businesses have been availing the benefit of the concessional CST rate of 2% (through Form C) on their input side.

By way of background, Section 8 of the CST Act provides for ‘rates of tax on sales in the course of inter-state trade or commerce’. Sections 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), CST is leviable at a rate equal to the VAT rate applicable to sale/purchase of the goods in question under the VAT laws of the seller’s state (usually much higher than 2%).

Many favourable judgments were issued by High Courts, post introduction of GST, upholding the continued eligibility of Form C and the consequent concessional CST rate. In most of these cases, 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 judgments.

The amendment proposed in the Budget in Sub-Clause (b) of Section 8(3) significantly curtails the scope of end-uses eligible for this concessional rate of 2%—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 of non-GST goods for usage in telecom network (this would include diesel used for generator sets in telecom towers);
—Purchases of non-GST goods for usage in mining;
—Purchases of non-GST goods for usage in generation or distribution of electricity or any other form of power; and
—Purchases of non-GST goods for usage in manufacture or processing of goods (except for rare scenarios where non-GST goods are being purchased for usage only in manufacture or processing for sale of non-GST goods).

This proposed amendment is expected to come into force with effect from July 1, 2021.

Even after the onset of GST in 2017, businesses in manufacturing, telecom and mining, which have heavy consumption of petrol, diesel, natural gas, have been availing the benefit of concessional CST rate of 2% (through Form C) on their input side—once this amendment is in force, they will have to bear the input-side CST at rates varying 15-31% (or more, depending on state to state) instead of 2%.

Needless to say, all such businesses will be forced to consider reworking their product pricing by factoring in enhanced input tax costs. But the ability to pass on enhanced input tax cost completely, in the current economic scenario, is doubtful.

Even within the power generation sector, this can be a significant blow for gas-based power generation facilities that have anyway been struggling for years since tax cost on purchase of natural gas will go up significantly (unless natural gas is subsumed within GST soon—a topic on which central and state governments have repeatedly gone back and forth over the years).

In some cases, this proposed amendment, once in force, may 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 businesses would have been looking up to the government for support, this amendment seems counterintuitive and representations are being filed seeking a rollback of this proposal. If a rollback 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.

The author is partner, Khaitan & Co