Exemptions: tax-breaks or tax brakes?

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: Producers of several goods in Uttar Pradesh are threatened by imports originating from Uttaranchal, where manufacturers of these goods enjoy exemptions and concessions from payment of excise duty, income tax and sales tax.

The variations in tax structure, as well as the range of concessions and exemptions in different states, are becoming aberrations and need to be dealt with seriously. Couldn’t a cue be taken from the anti-dumping system at WTO and states, whose industries suffer, be allowed to impose penal levies on specific goods ?

— VK Agarwal, Sashi Cables Ltd, Lucknow

The ad hoc tax concessions and discriminatory fiscal policies are creating many problems for industry. SMEs are particularly hit by such measures, as they are embedded in the socio-geographical milieu and find it extremely difficult to relocate. What surprises one is that these tax exemptions are not just provided by states, but are more related to central taxes.

Of late, the rush towards these concessions has turned into ugly ‘competitive populism’. There has not been any evidence that tax concessions lead to sustainable industrialisation in states. The experience on the contrary suggests that these concessions lead to undue advantage to the manufacturers of the beneficiary state at the expense of closure of industry in the neighbouring states.

Because of fierce competition in the markets, these concessions are usually passed on and end up distorting the markets. Further, once the concessions are withdrawn or come to an end, the units relocate to the states, which offer more concessions. Overall, both the states and the nation lose out.

Several experts have drawn attention to the pitfalls of such fiscal measures. In his report, Vijay Kelkar had also emphasised on the need to review the policy of granting exemption based on location. He further stated that taxes, concessions, levies and incentives in a particular state should not be the criterion for an entrepreneur to locate his enterprise.

Recently, the parliamentary standing committee on industry also took cognizance of the matter and is in the process of preparing a detailed report on the issue.

In a federal structure of states, like in India, the same principle needs to be applied rigorously in the course of inter-state trade so that the distortions created by such policies of the state and the central government are effectively eliminated.