CII joins chorus against Karnataka's business policies

After the IT sector, it is the turn of industry to speak out against the inadequate infrastructure and heavy taxation by the state government.

The Karnataka chapter of the Confederation of Indian Industry has come down heavily on the state's poor response to its demand for lower taxes, power rates and infrastructure concerns.

In view of the fresh taxes announced in the recent state budget, CII-Karnataka feels that profitability of power-intensive industries in Karnataka will take a hit to the extent of 4.7""8.3 per cent this fiscal, while those that are power dependent will take a 2""2.9 per cent hit.

Addressing mediapersons, K K Swamy, chairman-CII Karnataka and deputy managing director, Toyota-Kirloskar Motor Ltd, said, "The signals being sent out by the state to investors are disturbing. The perception of an 'industry unfriendly' state is gaining credibility as a result of the heavy taxation and poor infrastructure. These perceptions need to be addressed immediately."

CII felt that Karnataka was on the verge of losing its pre-eminent status as the investment hub due to its "short-sighted" policies.

"The industry is operating at very low profit margins, which are currently 2""7 per cent. These taxes translate into additional costs of about 10 per cent. While the impact on the profit margins are high, the inclusion of the special entry tax has come in as another stumbling block," Swamy added.

Swamy said that the recent introduction of the special entry tax (SET) has rendered industry in Karnataka uncompetitive. CII feels that this may even result in the "flight of capital" to neighbouring states over time. CII highlighted that as a result of SET, most items experience double taxation.

CII noted that the government has completely reversed its policy on not only generation but also investment in captive power. Moves like withdrawal of tax concession of 4 per cent on diesel, increase of tax on diesel from 17.5 per cent to 20 per cent, among others, have resulted in an effective tax increase of 4""20 per cent in Karnataka.

The cost of power in Karnataka (Rs 4.73 per Kwh) is about 38.3 per cent higher than that in Andhra Pradesh, 36.7 per cent higher than that in Maharashtra and 15.8 per cent which higher than in Kerala.

While the minimum floor rate suggested by the Empowered Committee was 4 per cent, Karnataka also levies a sales tax of 13.8 per cent on IT products, which has been criticised by all IT companies.

CII calculates that the withdrawal of concessional tax on machinery, tools, among others have rendered the local industry umcompetitive by 8 per cent as the Karnataka sales tax for machine tools has gone up from 4 per cent to 12 per cent.

Entry tax withdrawn

The government of Karnataka has decided to withdraw the special entry tax on goods entering into the state. The decision to withdraw has come into effect from October 20.

This special entry tax was levied on items that entered the state and which were up for sale or for use as raw materials or components in the manufacture of other goods for sale by dealers registered under the Karnataka Sales Tax Act.

Soon after the state government made the announcement at the beginning of this month, various sections of the industry objected to the move as it resulted in double taxation. For instance, petroleum products had a special entry tax of 16 per cent over and above an entry tax of 5 per cent.

Similarly, tyres and tubes had a special entry tax of 13.8 per cent over and above an entry tax of 2 per cent.

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Industry's pangs

• Effective tax increase for captive power between 4 and 20%.
• Power at Rs 4.73 per Kwh, most expensive compared to neighbouring states.
• Highest sales tax on IT products at 13.8%.
• Total tax burden on industrial inputs 4.6%.
• State-based 100% suppliers to EoUs taxed at 4.6%.