"Nothing should be done which will distort economic incentives or a level-playing field and render Tamil Nadu uncompetitive vis a vis its neighbours. It would be highly ill-advised to offer across the board area-based tax concessions," CM J Jayalalithaa said.
In her letter to PM Narendra Modi, she noted that any extension of such area-based tax concessions to Andhra Pradesh and Telangana would cause a huge flight of capital and relocation of industries, in particular from neighbouring states such as TN. It would also make the neighbouring states uncompetitive. In fact, such concessions to new industries would render existing industries, both in neighbouring states and even in states where such concessions are granted, uncompetitive. These are grave risks which cannot be ignored, she stated.
The Andhra Pradesh State Re-organization Act, 2014, already contains a substantial and significant economic package. 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 reform a rational tax policy that is neutral, encourages a common market, rewards competitive efficiency and exploits comparative advantage, she said.
Any shift of investment 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, she added.
A conscious attempt has been consistently made at harmonising indirect tax rates among 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 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 Uttarakhand in 2003.
According to her, such area-based exemptions are also fiscally expensive. The statement of revenue foregone presented to Parliament in July 2014, along with the Budget for 2014-15, indicates that the total revenue foregone through such area-based tax concessions during 2013-14 was R9,267.5 crore in direct taxes and almost R18,000 crore in excise duty. These are revenues which could have been shared with the states. If a similar concession is extended to the successor states of Andhra Pradesh and Telangana, the fiscal impact would be substantially greater, given the larger size of the states and the fact that these states have a fairly well developed infrastructural base, she pointed out.