M J Antony: The tale of incentive schemes

OUT OF COURT

The period of change of government could, in Dickensian terms, be the best of times and the worst of times for industrialists. The new political masters might discard the old policies and launch new ones. Concessions granted by the old government to some industries might be withdrawn and new ones announced to benefit others.

All these are not strictly economic decisions, but for "extraneous reasons", as described euphemistically in legal parlance. The old incentive schemes could, therefore, be caught in legal knots. Some recent cases in the Supreme Court were typical of this phenomenon, like State of Himachal vs Gujarat Ambuja decided late last month.

Gujarat Ambuja invested Rs 500 crore in a cement plant in Himachal Pradesh in the early 1990s, expecting deferment of payment of sales tax, electricity duty and other encumbrances. The government granted the benefits and declared it as a "Prestigious Cement Unit" in the state.

Then a coalition government came to power. According to the company, the Excise and Taxation Minister, who belonged to a coalition partner, and his party leaders started issuing a number of statements against the company questioning its entitlement to the concessions.

"On account of such extraneous reasons and influence and with ulterior motive, action was initiated by the commissioner of sales tax in an arbitrary manner, proposing to revise the earlier orders," said the company. Associated Cement Ltd, another company, also had a similar tale to tell.

Both companies moved the high court, which quashed the orders and show cause notices of the revenue authorities under the new government. It followed the 1991 Supreme Court judgement in State of Bihar vs Suprabhat Steel Ltd, which had stated in a similar situation thus: "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 proclaimed by the government itself."

There were at least three major judgements by the Supreme Court in similar situations in the last year itself. In Bannari Amman Sugars Ltd vs Commercial Tax Officer, the Madras High Court upheld the withdrawal of government concessions.

On appeal, the Supreme Court reversed it and emphasised that though the executive discretion to change policy was wide enough, it should be done fairly and not give an impression that it was done arbitrarily or by any ulterior criteria.

"If the state acts in the bounds of reasonableness, it would be legitimate to take into consideration the national priorities and adopt trade policies. The ultimate test is whether on the touchstone of reasonableness, the policy decision comes out unscathed," the judgement said.

In State of Bihar vs Bihar Rajya Mahasangh, the governments of Bihar and Jharkhand maintained that they were not bound by the decisions of the previous governments in the matter of absorption of college employees in the various universities. The Supreme Court underlined that the state was the author of the previous decisions.

Therefore, it could not go back on those decisions. If the earlier decisions were not acceptable to the newly-elected government, it was open to it to withdraw them formally. But the new governments could not claim that they were not obliged to follow the earlier government's policy decisions.

The Supreme Court, in TISCO vs State of Jharkhand, dealt with the 1995 industrial policy of the Bihar government which offered sales tax concessions to new units for eight years. TISCO set up a cold rolling mill in Jamshedpur, investing about Rs 2,000 crore.

Later, the unit became part of the new state of Jharkhand. It gave a new interpretation to the old notifications, denying the tax benefits to the industry.

When the company moved the high court, it ordered an enquiry by the commissioner. On appeal, the Supreme Court quashed the enquiry, observing that it would amount to harassment of the company. It directed the new government to give the promised tax benefits to the company.

This type of harassment of investors could be seen in several other judgements of the Supreme Court also, over a long period. It appears to be a hangover of the past when the governments had tight control over the future of corporations.

Scrapping of concessions is also resorted by the new government to fill up the coffers, usually left empty by the previous government. "Extraneously" speaking, it could even be a policy to fill the party coffers, left lean by the elections. Whatever it may be, the catena of cases show that the government should not renege on its promises except for fair and just reasons.