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Several exemptions are being afforded as a matter of necessity so much that GST is being opposed by SSI units for fear of losing their excise exemptions. Author believes that all exemptions from indirect taxes are unproductive and hence, worthy of discontinuation.


Start from consumer’s end. Consumer buys a product from retail without knowing whether it was made by an SSI unit or a unit from exempt areas such as Kutch, North East or other exempt states like Utterakhand, Jammu and so on. He pays a competitive price where similar product made elsewhere and being subject to full excise duty and sales taxes are competing both in price as well as quality. For a given quality, he pays the lowest price. Quite naturally, tax paying manufacturers are surviving which means they are able to sell their products in the market in competition with products from exempt manufacturers. If they survive with full payment of taxes, it is evident that the excise duty and sales taxes not paid to the exchequer are being collected by the manufacturer himself, and no such benefit is passed on to the consumer. Thus, such exemptions do not benefit the consumer at all. They apparently cost to the exchequer and hence, they apparently benefit only the manufacturer who is exempt from such taxes. Is that desirable?


SITUATION ONE, the exempt unit is unable to survive without such exemptions. It can only mean that the other tax paying units are far more efficient and cost effective. Such exemptions in this case only subsidize a unit’s inefficiency or use of older technology or whatever. This way, the policy is preventing India from fast moving into higher and more efficient technology and is counterproductive.


SITUATION TWO, the unit could compete but is given extra incentive for making investment as has been done for certain location based exemptions like in North East or J&K etc. Even this situation is counterproductive for the nation as it encourages diversion of scarce capital into lower productivity at the cost of a situation where capital is employed in most effective and most efficient application. Consider the case of massive investment in pharmaceutical units set up in Baddi. This was done by shutting down in full or part, existing factories in other parts of India. The capital invested in such factories was wasted and new capital was employed for new factories in Baddi. This certainly benefited the residents of Baddi but India lost handsomely. This is bad economics for sure.


EXEMPTIONS TO SSI UNITS -  In a situation where the SSI units are supplying their produce to larger units subject to full tax, such SSI exemptions are completely meaningless. Rather in most such cases, their large scale customers employ the method of job-work in order to avail the cenvat credit of excise and VAT paid on raw materials which would otherwise, not be available by virtue of SSI units being exempt from tax. Hence, SSI units simply DO NOT need any exemptions in this situation.

In another situation, where SSI units are selling their products to consumer in competition with non-exempt large scale manufacturers, consumer is paying full price which is inclusive of such taxes for the large scale competitors. It would only mean that either the SSI unit is making super profit at the cost of the exchequer or is being subsidized for its failure to be as efficient a manufacturer as its large scale competitor is. This situation is not in national interests either.


Finally, the situation where SSI unit is unable to keep its cost competitive with large scale and needs exemptions so as to remain in business rather than shutting down factories and get salaried jobs with large scale units. If there are technological reasons where the contemporary technology is far more expensive and productive than being affordable for SSI units, there is no reason for government to encourage SSI units to be in that particular business. For example, cars cannot be produced by SSI units as the technology will require much bigger scale and much bigger investment in which a govt would be silly to offer subsidy at the cost of exchequer to keep some afloat that the principles of economics have destined to sink. The govt must ensure that most contemporary technology is used in industry which means more investment, lower cost of production but much larger production capacity, and all that is not within the scope of SSI units.


Then, the final argument of being employed on salary. This is a political situation. I personally do not find anything wrong in a person being employed on salary and do not find any reason why exchequer should pay for his inflated ego of being a businessman when he cannot compete with others in the field. Simply principle of economics is that an inefficient unit must shut down as to release capital for more efficient utilization, and hence, it should easy to start a business and likewise, easy to shut down as well. The concept of SSI and any tax breaks to them is a political luxury which time has come to shun, and rise on merits.


With GST implementation, if SSI exemptions are lost, wise people should welcome it. In fact, under GST regime, any exemption to SSI would be completely meaningless because customers of SSI units would have no problem paying the GST when they buy from such SSI units as this GST would be available to them as input credit. If they sell to the consumer, that poor chap is bound to pay full GST anyway, so where is the problem for SSI units? They should be happy that they will be getting full credit for GST paid on their inputs.


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Category Taxation, Other Articles by - Anil Kr Garg