Tax benefits to hill states may be cut

Excise duty and other tax exemptions for attracting industries to hilly states may not go away, but could be limited to fresh investments in the Union Budget for 2007-08.

"The government may fine-tune the (industrial package) scheme in 2007-08 budget by limiting tax concessions only on fresh investment. It will blunt the criticism of the scheme and check shifting of the industrial units (from plains to hilly states)," official sources said.

However, Central Board of Direct Taxes( CBDT) spokesperson A K Sinha told said that "there is no proposal in the Finance Ministry at this stage to withdraw tax concessions to Himachal Pradesh and Uttaranchal."

The Centre had, in August, exempted new investments made in these two states before March 31, 2010 from excise duty. The scheme was to have expired on March 31, 2007. Besides, the government has notified income tax holiday for units in these states up to March 31, 2013.

Admitting that these tax concessions were opposed by the neighbouring states of Punjab and Haryana, Sinha said, "Tax concessions have been given to investors, considering the geographical disadvantage inherent to these states. The purpose of these concessions still remains to be achieved."

He said only certain pockets in Uttaranchal and Himachal like Rudarpur and Baddi have benefited from these concessions, and industrial houses are reluctant to invest in other areas.

However, Finance Ministry sources said, "Considering the political fall-out of withdrawal of these taxes, especially in Uttaranchal where assembly elections are scheduled by March, Finance Minister P Chidambaram has ruled out any possibility of withdrawal of these tax exemptions."

Although these area-specific tax concessions cost the exchequer about Rs 1,500 crore in 2004-05, these exemptions were extended considering that only few industries have so far invested in these states.

Industries in Uttaranchal and Himachal enjoy a number of sops, including a 10-year excise holiday and 100 per cent income tax waiver for first five years.

Besides new industrial units can also avail of a 15 per cent capital subsidy or a maximum of Rs 30 lakh.

Referring to shifting of some industrial units from Punjab, Haryana and neighbouring states, sources said, "Government may fine-tune the scheme in 2007-08 Budget by limiting the tax concessions only on fresh investment".