Spiral to nowhere

Updated: Sep 30 2006, 05:30am hrs
The Prime Ministers call for caution by the states in providing incentives and tax breaks needs to be taken seriously as the competition for attracting investment heightens. States now offer a wide range of incentives across sectors, the quantum of freebees varying with the size of investments and their job potential. Though no exhaustive estimates are available on the cost, the numbers are too large to be ignored. A recent World Bank study estimated that Maharashtra alone would lose around Rs 124,000 crore during this decade owing to their incentives package. Though the scheme has since been discontinued, existing companies will continue to get the tax breaks till the end of the decade. Such large incentives have reduced Maharashtras tax revenue to GDP ratio below states like Haryana, Kerala, Karnataka and Tamil Nadu. Some experts even claim that the incentives exceed the quantum of investments in many cases. Such a race to the bottom, as the PM noted, will serve no purpose and hit all states equally hard.

The experience of the North East Industry Policy of 1997, which offered tax holidays to industries investing there, offers enough lessons. The region continues to be dominated by small and medium units and there has been only an exodus of excise-intensive units to more developed states like Assam and Meghalaya, which attracted the major share of investments. Studies have shown the region would gain more if investments were made in infrastructure. And even the limited gains made are now threatened by extension of the tax holidays to Himachal Pradesh and Uttaranchal, which has led to migration of companies from neighboring states and even from the south. Perhaps the PM could himself implement these insights and set an example for the states to follow. Estimates put the Centres foregone revenues from tax concessions at Rs 1,58,661 crore, of which around a third were corporate income tax concessions to provide incentives for investment in infrastructure and backward areas. The states could quantify the impact of the concessions they offer and have a schedule to reduce the incentives to the minimum.