Tamil Nadu CM against Area Based Exemptions
THE Tamil Nadu Chief Minister Jayalalithaa has written to the Prime Minister expressing her strong reservations against extending area based excise duty exemption to the newly created States of Telangana and Andhra Pradesh.
In her letter Madam Chief Minister told the PM,
As you are aware, the general direction of taxation reforms in India has been towards rationalization and simplification of various exemptions. A conscious attempt has been consistently made at harmonizing indirect tax rates amongst States and to eliminate harmful tax competition. This led to the introduction of the Value Added Tax regime which substituted the earlier Sales Tax regime at the State level. The Centre, over the last two decades, has also attempted to reduce and eliminate various exemptions. A major aberration in this regard was the introduction of area based exemptions from income tax and central excise for new industrial units located in certain parts of Himachal Pradesh and Uttaranchal in 2003.
I recall that there was a spirited debate on this issue in the meeting of the National Development Council held in June, 2005, and I had also written to the then Prime Minister seeking withdrawal of such exemptions in August 2005. In the NDC meeting, almost all the Chief Ministers had even then favoured the scrapping of such exemptions as they significantly distorted the investment decisions of companies and corporate houses, thereby drastically affecting the investment climate in their own States.
Independent analysis has also acknowledged that the area-based exemption scheme was not calibrated properly and did not take into account the possibility of flight of capital and relocation of units from other States in the country. Any extension of such area based concessions to Andhra Pradesh or Telangana would cause a huge flight of capital and relocation of industries, in particular from neighbouring States. It would also make the neighbouring States totally uncompetitive. In fact, such concessions to new industries would render existing industries, both in neighbouring States and even in the States where such concessions are granted, completely uncompetitive. These are grave risks which cannot be ignored.
It must also be pointed out that when a bifurcation of three States took place in 2000, neither Jharkhand and Chattisgarh, two of the newly created States nor the residual States of Bihar, Madhya Pradesh and Uttar Pradesh received any such fiscal incentive.
A very limited, time bound exemption may be justified to enable an area to recover from a natural disaster. An area based exemption was granted for a limited period of 3 years for the Kutch area of Gujarat in 2001 soon after the devastating earthquake that struck the area. However, when I made a similar request on 6th June, 2005, for a limited excise duty holiday for the areas affected by the catastrophic tsunami in Tamil Nadu in December 2004, no such concession was provided by the then UPA Government even when adequate justification existed.
Hence, I strongly urge you to adopt a cautious approach to the complex issue of providing area based tax concessions in the name of encouraging economic development in these two States. Such exemptions run counter to one of the basic thrusts of economic reforms - a rational tax policy that is neutral, encourages a common market in the country, rewards competitive efficiency, and exploits comparative advantage. Any shift of investments from States with a strong infrastructure and trained manpower to other States motivated by tax reliefs alone would undo the two decade long work of rationalisation of tax structures.
Despite having put in place sunset clauses on area based exemptions during their two terms in office, the previous UPA Government, on grounds of sheer short term political expediency, offered this vaguely worded promise of taking appropriate fiscal measures including distortionary tax incentives. This reflects the moral bankruptcy of the previous UPA Government.
Your Government must exercise the greatest care in approaching this issue. Nothing should be done which would distort economic incentives or a level playing field and render States like Tamil Nadu uncompetitive vis a vis their neighbours. It would be highly ill- advised to offer across the board area based tax concessions.