Himachal Pradesh and Uttarakhand, the two Himalayan states which have drawn thousands of crores of investments due to the tax benefits they offer, stare at the possibility of losing the status as Finance Minister Pranab Mukherjee looks to plug loopholes and boost revenues for a government that’s on a spending spree. “Excise exemption to these two hilly states is under review,” said a government official who did not want to be identified. “A final decision would be taken by Prime Minister on the issue.”
Mr Mukherjee who has spent record funds this year to revive economic growth may rollback at some fiscal stimulus measures in the coming budget and also withdraws some special tax exemptions as he pushes for a friendly goods and services tax.
Investments in these two states were exempted from excise duty as a special case to push growth in the economically backward regions which some say were misused. These exemptions lapse in March 2010, unless extended.
Hindustan Unilever, makers of Dove and Lifebuoy soaps and motorcycle maker Hero Honda are among scores of enterprises that have invested in the two states and shown high profitability that boosted their share prices.
If the exemption is not extended, many companies which planned to invest in those states may not do so. The governments of these states have already written to the Prime Minister lobbying for an extension. These exemptions were criticised for many reasons — misuse, flight of capital from neighboring states and skewed development in states.
So, to minimize the damage, the government tinkered with rules last year as it tightened the eligibility norms for availing excise exemption in these states. Companies that carried out labeling, packaging or sorting instead of manufacturing were no longer eligible for the tax holiday.
The various area-based tax exemptions are estimated to have led to revenue loss of over Rs 10,000 crores this fiscal year to the government, hence there is a move to reverse some of them.
Units in Himachal and Uttarakhand that start their commercial production before March 31, 2010, enjoy 100 per cent excise exemption. The period of exemption from the start of the date of commercial production and is available for 10 years.
However, all investments made up to March 31, 2010, will continue to enjoy the benefits for 10 years even if the 100 per cent excise holiday is allowed to lapse.