Andhra Pradesh Industrial Policies

Review of Tax Incentives_MSMEs

February 2019
Background

The State Government of Andhra Pradesh, with a view to spur industrial growth, has been offering
various incentives to make industries based in Andhra Pradesh competitive

In this direction, the Government has released various polices targeted at the industries in general
and few sectors in particular. These polices are valid from 2015 through 2020

The earlier system of taxation was origin based i.e., the revenue from VAT and CST paid by the units
on sales from A.P. accrued to the State and the same was allowed as incentive to the units

With the introduction of GST, the supplies are subject to the principle of destination based tax and
the revenue accrues to the State where goods are consumed. As such, the State government gets
revenue from the units only to the extent goods are consumed within the State

In light of the above, Government has offered incentives in the form of “reimbursement of Net SGST
paid” to units. This has lead to a significant decrease in the amount of incentives and the industry
has expressed their concerns in this regard

Considering the above, the government is of the view that the incentive polices should be revisited
and new polices should be devised keeping in view the effect of GST

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Key Assumptions/Limitations

 It is assumed that the analysis is required only to evaluate the indirect tax implications on the
policy actions in view of change in the tax regime. This does not involve the assessment of impact
of other benefits accruing to the State such as employment intensity, other revenues accruing to
the State apart from GST etc

 Our analysis is limited to identifying various alternative mechanisms and the impact of each
alternative; the responsibility to choose the best option will rest with the State Government

 Our analysis and conclusions are based on the sample data provided to us pertaining to Krishna
and Guntur Districts

 The impact of additional revenue flowing to the State on account of SGST on services and share of
IGST has not been considered in our analysis

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MSME – Existing Benefits

AP Industrial Development Policy -

MSME
Micro Enterprise, Small Enterprise and
Medium Enterprise are determined based
on investment in plant and machinery up to
limit as defined by the Government of India
from time to time. Present limits are as
below:
• Micro Enterprise - Does not exceed 25
lakh rupees
• Small Enterprise - More than 25 lakhs
but does not exceed 5 crore rupees
• Medium Enterprise - More than 5 crore
rupees but does not exceed 10 crore
rupees
Existing Incentives
•Reimbursement of 100% stamp duty on
purchase/lease of land/building
•Uninterrupted 24*7 quality power & Fixed
power cost reimbursement of Re. 1 per unit for
5 years
•Reimbursement of 100% Net VAT/SGST/CST
for 5 years for micro and small enterprises and
75% Net VAT/SGST/CST for 7 years for
medium enterprises
•Zero rating of goods for MSMEs engaged in
waste recycling
•35% subsidy on plant & machinery for specific
cleaner production measures upto Rs. 35 Lakhs
•25% subsidy for sustainable green measures
upto Rs. 50 Cr.

Currently, Govt is offering reimbursement of 100% of Net SGST to Micro & Small
enterprises for 5 years and 75% of Net SGST to Medium enterprises for 7 years in
lieu of of the above tax incentives
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Geographic Spread of MSME Sector

Vizianagaram Anantapur
West Godavari
3% 7%
10% Visakhapatnam
Srikakulam 8%
4%
S.P.S Nellore Guntur
5% 13%
Prakasam
5%

Kurnool COMPOSITION OF MSME IN

7% KRISHNA & GUNTUR
Kadapa
3% Krishna Medium
15% 4%
East Godavari Micro
12% Chittoor 19%
8%

Small
77%

Medium Micro Small

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Incentives under GST- Suggested Approach
MSME Units

Composition
Regular Tax Payers Exempt Tax Payers
Dealers

• Option – I • Option –I • Option – I

Net SGST Output SGST SGST paid on Inputs

• Option – II • Option –II • Option –II

Gross SGST on B2C + Output SGST + SGST • Net SGST (No
Net SGST for other paid on Inputs incentives as the unit
supplies does not pay output
tax)
• Option – III
Net SGST + Net IGST
@ 2%

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Analysis of the Suggestions ……1/2

Option Revenue Source of Data Ease of Other Comments

Neutrality Computation
For Regular Tax Payers

Net SGST* Status quo GSTR 3B – Table Very Easy

compared to 6.1, Column 8
existing policy Calculation 1

Gross SGST on Revenue from GSTR 3B – Table Easy As the ultimate

B2C + Net SGST* unit is paid 6.1, Column 8 & consumption of intra
for other supplies back - not GSTR 1 – (Table state B2C supplies is
status quo 7A+- 10A), within AP, SGST paid
compared to Column 5 on such supplies
existing policy Calculation 2 accrues to the State
Net SGST + Net Not Revenue GSTR 3B – Table Very Easy Considering the fact
IGST @ 2% Neutral 6.1 Column 8 that Net CST (2%) was
provided as incentive
in pre-GST regime,
Net IGST @ 2% can
Calculation 3 now be provided as
incentive

Net SGST paid by unit may not accrue entirely to the State if the B2B customer engages in inter-state sale
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Analysis of the Suggestions ……2/2

Option Revenue Source of Data Ease of Other Comments

Neutrality Computation
For Composition Dealers

Output SGST Revenue GSTR 4 – Table 13 Very Easy As the ultimate

Neutral consumption of taxes
Calculation 4 is within the State, the
tax paid accrues to the
Output SGST + Revenue GSTR 4 – Table 13 Very Easy State. Further, since
SGST paid on Neutral & {Sum of Table 4 composition tax payer
Inputs and Table 5 (POS is not eligible for
– AP only) } Calculation 5 credit, input taxes also
accrue to the State
For Exempt Tax Payers

SGST paid on Revenue GSTR 3B – Table Very Easy Since exempt tax payer
Inputs Neutral 4 is ineligible for credit,
the tax paid on their
procurements accrues
to the State.
Calculation 6

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Data Analysis
Snapshot of Data received

Particulars No of Units

Data Received 21 Units

Incorrect / Incomplete data 10 units

Balance 11 units

Out of the above

Medium Units 2 units

Small Units 9 Units (1 unit with inverted

duty structure)

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Pre GST Incentives Vs Proposed Incentives
Small Units
‘Amount in INR Lakhs
% of Intra State Sales Pre GST Incentive Incentives under Suggested Options Incentive as a % of Annual Turnover

Gross SGST Gross SGST

Net SGST
Net VAT/CST Reim for B2C + Net Net SGST + for B2C +
Sector Pre GST Post GST Net SGST Pre GST Net SGST + IGST @
(16-17) SGST for IGST @ 2% Net SGST
2%
others for others

Bakery Products 94% 85% 13 32 33 33 4% 7% 7% 7%

Cotton Ginning &
Pressing 100% 98% 56 69 69 69 2% 2% 2% 2%
Cotton Ginning &
Pressing 100% 99% 28 5 5 5 4% 2% 2% 2%
Cotton Ginning &
Pressing 100% 98% 7 6 6 6 2% 1% 1% 1%
Manufacture 100% 100 177 177 177 5% 9% 9% 9%
Manufacture 100% 1 3 3 3 3% 8% 8% 8%
Manufacture (Jars) 100% 96% 5 8 9 8 4% 4% 4% 4%
Manufacture (Jars) 69% 90% 12 47 47 47 2% 4% 4% 4%
PPP/HDPE ROPES 49% 13 - - - 1% Inverted Duty Structure

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 Pre GST Incentives Vs Proposed Incentives
Medium Units

‘Amount in INR Lakhs

% of Intra State Sales Pre GST Incentive Incentives under Suggested Options Incentive as a % of Annual Turnover

Gross SGST Gross SGST

Net SGST
Net VAT/CST Reim for B2C + Net Net SGST + for B2C +
Sector Pre GST Post GST Net SGST Pre GST Net SGST + IGST @
(16-17) SGST for IGST @ 2% Net SGST
2%
others for others
Cement (Fly Ash) 62% 86% 13 8 21 8 2% 1% 2% 1%
Textile and Apparel 92% 90% 67 23 23 23 1.26% 0.34% 0.34% 0.34%

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Analysis – Summary

Particulars Amount

Pre GST Incentives INR 316 Lakh

Post GST :

Under Option - 1 INR 378 Lakh

Under Option – 2 INR 392 Lakh

Under Option – 3 INR 379 Lakh

*The increase in incentives can be attributed to increase in outward supplies of the units

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Analysis – Summary (cont’d)

Based on the above analysis we understand that

100% compensation of incentives may not be completely

achieved.

Out of the 3 options, Gross SGST on B2C supplies + Net SGST

on other supplies shall be beneficial to the units.

However, Government may consider sharing all the 3 options to

the units and allow the units to select the option which suits
them best

The above can be revisited on a yearly basis

Going forward, it is suggested that the Government may opt to

provide incentives linked with the performance of the company
such as employment generation etc., in place of tax based
incentives.

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Recent Developments
Amendment to the manner of
utilisation of GST credits
● As per GST Amendment Act,
order of utilization of credit
has been changed wef 1 Feb
2019
● This may have impact on the
net SGST payable by the
units in future and in turn
on the tax reimbursement
● This will not impact the Net
SGST paid till 31.01.2019 as
this amendment is effective
from 01.02.2019
● This amendment is
explained in detail with
illustration in the Annexure
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CAG view on IGST
distribution to States
● As per the latest financial
audit report on Accounts of
Union Government vide No.
02/2019, it was observed by
CAG that distribution of
IGST revenue is not as per
the IGST Act, 2017.
● CAG advised in its report
that GoI needs to account
for its share correctly.
● Devolution should take place
from 50% of IGST revenue
(Central share)
● Remaining 50% should be
distributed to States
*source: News Article - DNA exclusive
Maharashtra New Industrial
Policy*
● Maharashtra Govt. launched
new policy with gross SGST
refund to lure investors
● Maharashtra is of the view
that Net SGST subsidy will
result in lower tax
reimbursement to investors
● Sometimes units may run
into inverted tax issues,
leaving investors with low
return, who then invest in
other States.
● The State will have to shell
out INR 4,000 Crores
annually to pay Gross SGST
reimbursements under its
new package scheme of
incentives
14
Thank You

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VS/April 2017-7252
Calculation 1: Regular Tax Payer – Option 1
Net SGST paid in Cash
Extract of GSTR – 3B

Back

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Calculation 2: Regular Tax Payer – Option 2
Gross SGST on B2C (A)
Extract of GSTR – 1

C B
Gross SGST (C) Net SGST (B)

Gross SGST on B2C + Net SGST* for other supplies = A + [B*{(C-A)/C}]

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Back 17
Calculation 3: Regular Tax Payer – Option 3
Net SGST paid in Cash
Extract of GSTR – 3B

#(Net IGST paid in

Cash)/18%*2%

#Assumed average IGST rate of 18%

Back
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Calculation 4: Composition Tax Payer – Option 1

Extract of GSTR – 4

Output SGST

Back
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Calculation 5: Composition Tax Payer – Option 2
Extract of GSTR – 4

Output SGST Sum of SGST paid on

inputs, if POS = AP

Back
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Calculation 6: Exempt Tax Payer
Extract of GSTR – 3B

SGST paid on eligible inputs

Back
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Order of Adjusting ITC – Changes wef Feb 2019
Up to 31.01.2019
Input tax credit
1st Preference 2nd Preference 3rd Preference
availed from
IGST IGST CGST SGST
CGST CGST IGST NA
SGST SGST IGST NA

From 01.02.2019
Input tax credit
1st Preference 2nd Preference 3rd Preference
availed from
IGST IGST CGST SGST
CGST IGST* CGST NA
SGST IGST* SGST NA

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 Illustrations
Position before amendment
Paid through ITC Additional
Descri GST ITC ITC
cash
ption Liability available IGST CGST SGST Balance
required
IGST 500,000 1,000,000 500,000 - 400,000
CGST 500,000 650,000 - 500,000 - 150,000
SGST 500,000 400,000 100,000 400,000 - -
Total 1,500,000 2,050,000 600,000 500,000 400,000 - 550,000

Position after amendment

Paid through ITC Additional
Description GST Liability ITC available cash ITC Balance
IGST CGST SGST required
IGST 500,000 1,000,000 500,000 - -
CGST 500,000 650,000 500,000 - - 650,000
SGST 500,000 400,000 - 400,000 100,000 -
Total 1,500,000 2,050,000 1,000,000 - 400,000 100,000 650,000

As noted from the above illustration, SGST paid in cash increased by Rs. 1 Lakh pursuant to the amendment, thereby
entailing the unit for additional incentive of Rs. 1 Lakh

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