Karnataka industry crippled by multi-point taxes

The danger of flight of businesses from Karnataka may not be solely because of the lack of infrastructure. The state government's taxation policy at various points for a business has weakened the local industry's ability to fight competition from industries in other states.

One of the most critical issues facing Karnataka's industries is the tax on diesel used for captive power generation. The tax was effectively hiked to 20 per cent recently from the earlier 4 per cent.

Said K K Swamy, CII - Karnataka region: "Successive governments in the state encouraged industries to set up captive power generation units as they could not provide quality and uninterrupted power supply. After the industries installed these units, the tax has been hiked substantially, making diesel costlier by Rs 5.50 per litre. This is a huge blow for industries in the state and we will lose our competitiveness to neighbouring states where such tax is nil or meagre."

In addition to this, Karnataka's industries have to pay an input tax on industrial products which currently stands at 4 per cent.

"This is invariably multi-point in nature and has a cascading effect on the final cost of the product. The difference increases at every point of levy. Thus, if a final product has to go through two or three stages of manufacture before it becomes a finished good, there is a tax levy at each stage. This is a huge burden on the manufacturer and final consumer and retards industrial growth. As if adding insult to injury, the state has imposed a cess on industrial imputs which will amount to an additional levy of 0.6 per cent on costs," said Venkatramani, a leading tax consultant.

Adds Swami: "There are a number of export-oriented units in the state. If a supplier from Karnataka supplies 100 per cent of his production to these EoUs, there is an input tax, but if the EoU sources the same products from across the border there is no tax. In this situation, it makes sense to source from our neighbouring states. This will severely hit the manufacturing sector in Karnataka."

His fear: "We will lose our competitiveness drastically. When we are competing with states like Maharashtra and Haryana, we have to have a level playing field. We are not asking the government to do away with taxes, but to tax at one point. There is no point in killing the goose that lays golden eggs because we keep paying taxes. No one wants to move out of the state, but there is a limit."

One more aspect that industries in the state are worried about is the taxes on hardware and software products. These are proposed to be subject to be taxed at 13.8 per cent, including cess.

Said Venkatramani: "The tax rate in neighbouring states on software and hardware is 4-5 per cent. This move will make consumers purchase software and hardware from other states by paying the full rate of central sales tax at 10 per cent. In this scenario the revenue being generated on account of local sales of software and hardware will dwindle."