By Parnika Jhunjhunwala
The discourse on taxes and subsidies has always been a debatable topic in India. The Indian government has decided to exempt Uttarakhand, Himachal Pradesh and the North-Eastern states from excise duty till 2027.
A new scheme, which the Department of Industrial Policy and Promotion (DIPP) is working on, will replace the current area-based scheme. Although companies will not be tax-exempt, they will have to pay the tax upfront and then apply for the refund on tax later. The refund benefit will be customised based on the industry sectors.
The refund will be available to only those industries that availed the benefits of Central Excise Exemption in the Pre-GST regime. There is some opacity in the refunding process. At present, the Centre keeps 58% of the tax while the States keeps 42%. Therefore, the Centre intends to pay 58% of the tax as refund and the companies are to approach the States for the remaining share. However, is the minor shift from exemption to refund beneficial? Will the tax exemption boost the development of the concerned areas or is the government throwing away good money?
The dilemma of exemptions
Tax exemptions were beneficial for the companies, but there was also a risk of the registration of fake companies to evade taxes. Under the refund policy, all companies, irrespective of their revenues, will have to pay taxes and claim a refund later. This policy allows the government to recheck and thus disqualify the shell companies from claiming a refund.
In the pre-GST regime, the process of filing and claiming a refund was very tedious. However, the entire process has now been digitised. Rolling out refunds is riskier for the investor due to high levels of corruption. Since the system is more transparent now, there will be a greater ease in claiming timely refunds. A major drawback, however, is that working capital requirements for the companies might increase. A portion of their capital will be stuck in taxes until refunded.
For tax exemption, location is key
Although the idea of a tax exemption is appealing, it is also associated with high costs. The most visible is the forgone revenue. The government loses taxes from tax-free declared areas or from investors indulging in crafty tax planning. The second major cost is resource allocation costs, which is sometimes also labelled as tax induced distortion. Due to tax holidays in some specific areas, there are distortions in the choice of investment. There will be inefficient or suboptimal allocation of resources. Resources are allocated in areas where taxes are less or labour is cheap, instead of areas where they can be utilised to an optimum level.
A host of companies have set up their units in certain locations. For instance, Indias second largest bus and truck manufacturer, Ashok Leyland Ltd. and the worlds largest motorcycle company, Hero MotoCorp Ltd. have units in Patnagarh and Haridwar. More recently, Patanjali has set up its base in Haridwar as well, and the tax exemption worked out in its favour. Its revenue skyrocketed from Rs 163 crore in 2009-10, to a whopping Rs 10561 crore in 2016-17. Thus, tax exemptions provide a lot of incentives for prospective investors to establish their industries in remote areas.
The perks of nature
Some companies find that remote areas roll out the red carpet and provide personalised services, unlike in large cities. Remote areas also provide investors with a close proximity to raw materials, especially in the north-east. For instance, tea processing industries can be set up near tea estates. Assam has the maximum concentration of bamboo in the entire northeast region. Thus, setting up of handloom industries can be promoted.
The northeast is also famous for its silk. Sericulture is widely practised so more textile processing industries should be set in close proximity to the silkworm rearing centres. This would reduce transportation costs and skilled local labour could be utilised in the industries. Setting up new enterprises in such areas will also lead to the upliftment of the area by increasing employment and development. Thus, apart from financial incentives, setting up industries in remote areas is also beneficial in the sense that there would be opportunities to customise services.
Triumphs and trials ahead
The government seeks development of the less-developed areas by encouraging investors to set up industries. However, the tribal people, especially in the northeast, are resistant to such developments. They are apprehensive of exploitation from industrialisation, which will increase the integration of new technology and manpower. The local community faces realistic and symbolic threat from possible migrant workers. Despite tax holidays, the lack of skilled labour may trump all the benefits of the scheme.
Since industries cannot function efficiently without adequate labour and capital, capital will solely not serve the purpose. Thus, setting up of new industries also requires the facilitation of training unskilled workers. The decision to grandfather exemptions till 2027 might be in the favour of investors as well as the government. However, the outcome of the decision is still uncertain. Tax holidays in the past have helped industries as well as the economy. Hopefully, it will continue to do so.
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