M J Antony: Promises not kept

OUT OF COURT

State governments lure industries with incentives and then go back on their words.

A new government, flush with election victory, tends to announce incentive schemes to attract industry to the state, especially the backward areas. A few years after the industries are set up, the government searches for ways to back out of the promises on technical interpretation of the notifications. This leads to litigation and loss of confidence in the government. The recent Supreme Court judgement in Jai Beverages Pvt Ltd vs State of Jammu & Kashmir illustrates this problem.

The Kashmir government announced a package of incentives to industries, particularly to "prestigious units" having a capital investment of Rs 25 crore or more. They were exempt from general sales tax and central sales tax for five years, among other benefits. There were additional benefits for "prestigious units". The company in this case started as a medium unit, but later invested Rs 27 crore and was recognised as a "prestigious unit". However, two years after the commencement of production, the state department of industries denied the benefit to the company. One reason to deny the exemption in taxes was that the minimum of Rs 25 crore was invested at a later stage and not at the start. Another reason was that it was producing soft drinks, which was in the negative list. It was also argued that the Cabinet had reconsidered its decision and refused exemption and, therefore, the revenue authorities had to go by that decision.

The company moved the high court, but it dismissed the petition. In the Supreme Court, it was successful. The documents and material on record disclosed that the government took a conscious decision after Cabinet discussions to grant exemptions to new industries. "The state cannot be permitted to ignore its own decision to permit the company to invest Rs 25 crore. It acted on the basis of the decision taken by the state government.... In this background, the state cannot be allowed to say that the incentives cannot be extended to this industrial unit," the judgement emphasised.

A review of the recent Supreme Court judgements would show that almost every state government has this temptation to deny incentives offered while it came to power. Earlier this year, the Supreme Court dealt with a case from Haryana, Mahabir Vegetable Oil Ltd vs State of Haryana. In this case, the company established solvent extraction plants following the announcement of the Haryana government granting tax concession to units set up in the backward regions of the state. Bharat Rasayn Ltd also set up a unit on the government's promise to grant benefits to it. But later, the government amended the rules and denied the exemptions. The companies moved the high court in vain.

The high court's view was that "there cannot be any restraint on the state government to exercise the delegated legislative functions within the parameters laid by the statute". On appeal, the Supreme Court set aside the high court decision, asserting that by making amendments the government could not take away the rights of the companies with retrospective effect. "Not only have they invested huge amounts but the authorities of the state sanctioned benefits and granted permissions," the judgement pointed out.

Another recent case involved Tata Cummins Ltd, which invested Rs 302 crore and paid Rs 600 crore in taxes on the promise of the Bihar government that it would grant tax exemptions for setting up units in backward regions. But when the company claimed sales tax exemption and asked for refund, it was denied on technical grounds. The Supreme Court said: "When an assessee is promised tax exemption as a term of the industrial policy, we have to read the implementing notifications in the context of the industrial policy. The exemption notifications have to be read liberally and not in a strict sense as in the case of exemptions from tax liability under a taxing statute."

From Himachal Pradesh came another judgement involving Gujarat Ambuja, which invested Rs 500 crore in a cement plant, expecting deferment of payment of sales tax, electricity duty and other levies. It was declared a "prestigious cement unit". When the government changed, one of the new ministers began questioning the entitlement of the company to the concessions. Associated Cement Ltd, another company, also had a similar story to tell. When the companies moved the high court, it quashed the show-cause notices of the revenue authorities under the new government. It followed the Supreme Court judgement in State of Bihar vs Suprabhat Steel Ltd, which said: "It would not be permissible for the state government to override or negate incentives and benefits which many industrial units would be entitled to under the incentive policy." Inspite of such clear pronouncements, the governments repeatedly renege on their promises and violate the principle of legitimate expectation. This has a deleterious effect on the business confidence. The next time any government announces such incentive schemes, it should keep these Supreme Court decisions in mind, apart from the larger good of the economy.