Tax sops to units in hill states likely to be done away with

The finance ministry is likely to do away with area-based tax concessions in Budget 2007-08.

The finance ministry is likely to do away with area-based tax concessions in Budget 2007-08. This will give a jolt to Himachal Pradesh and Uttaranchal that have attracted huge investments at the cost of their neighbours Punjab and Haryana.

According to a finance ministry official, “With no other means of enhancing revenues, we will need to contain the number of area-based exemptions.” Such benefits to the industry had cost the government about Rs 1,500 crore in 2004-05.

While the tax exemptions for Uttaranchal and Himachal Pradesh were extended till 2007-08, the finance ministry is now planning to curb some of these and also withdraw many indirect tax sops.

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The move would put these two states at par with their neighbours. After the Budget, new units and expansions by existing units in Uttaranchal, Himachal and Kutch in Gujarat would not be eligible for tax sops.

The finance ministry was in a bind after Punjab and Haryana sought similar incentives to prevent existing industries from shifting to Himachal and Uttaranchal. Both claimed that exemptions had turned Baddi, an industrially backward area into a pharmaceutical and textile hub whereas most automobile companies now preferred Uttaranchal.

Even Gujarat and Tamil Nadu wanted the ministry to do away with area-based sops having lost a number of pharma investments in their region to the two hill states. Industries in the two states enjoy a number of sops including a 10-year excise holiday and 100 per cent income tax waiver for first five years. Besides, new units can also avail of a 15 per cent capital investment subsidy or a maximum of Rs 30 lakh.

The government was, however, likely to retain the sops offered by Jammu & Kashmir and the North Eastern states because these were special cases.

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The move to shunt out area-based exemptions is in tandem with finance minister P. Chidambaram’s recent statement that tax sops need to be pruned to meet the deficit targets.

What’s likely to go

• Direct tax sops extended till 2007-08, indirect tax incentives

Why the move

• Revenue enhancement — sops cost exchequer Rs 1,500 crore in 2004-05

• Demands for similar incentive from Punjab, Haryana, which claimed shift of business to Himachal Pradesh