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 Further, once the concessions are withdrawn or come to an end, the units relocate to the states, which offer more concessions.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.

You have suggested that Uttar Pradesh should be allowed to impose a levy on goods entering from Uttaranchal, in case a manufacturer in Uttar Pradesh can prove beyond doubt that his interest/competitiveness is severely affected due to the special advantage of exemption from CED, IT or concession in sales tax on input or finished goods being available to the exporter in Uttaranchal.

Imposing levies on the lines of anti-dumping duties under the WTO regime on the goods from states that resort to such policies is ingenious and theoretically sound, but seems difficult to implement.

Even in the WTO, the idea of anti-dumping is being criticised, for it has failed to achieve the desired results.

As a matter of fact, it has been used to propagate monopolistic behaviour by companies having greater muscle power. It has been misused tremendously even in India to further monopolies. When it comes to dispute resolution through complex laws and expensive legal procedures, it is unlikely that SMEs would be at an advantage.

However, that does not take away the crux that the present practice of granting ad hoc tax concessions borders on absurdity. On the one hand, we are drumming up the need to integrate the Indian markets by highlighting the need to have Vat and GS.

On the other, we are encouraging further fragmentation of the Indian market.

The right approach is what Dr Kelkar had suggested, that instead of exemptions based on location, “as a general policy, the targeted beneficiary may be assisted by upfront transparent budgetary support. Such an approach would ensure public debate and there would be no misuse of the exemption.”

As there is greater realisation of the adverse impact of such ad hoc concessions in central government, the least it could do is to take steps to put an end to the nuisance. It is high time now for the government to walk the talk.

Could you let us know about web sites relating to small-scale and medium industries. I plan to start a business and would like to gather as much information as possible.

— Arihant Jain

You may find the following sites useful in your research:

One, the Sido portal: www.smallindustryindia.com

Two, Network of Indian SMEs: www.smenetwork.net

Three, Federation of Indian Micro and Small & Medium Enterprises (Fisme): www.fisme.org.in

Four, Technology Innovation Management and Entrepreneurship Information Service: www.techno-preneur.net

And five, The National Small Industries Corporation: www.nsicindia.com

Anil Bhardwaj is former secretary-general, Fisme.