Online BusinessFMCG firms to be hit if hill state tax benefits withdrawn
The latest GST move is why the tax holiday notifications are being sought to be ended by March 2010.
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The Union finance ministry is mooting withdrawal of the tax benefits it has been giving to manufacturing units in Himachal Pradesh and Uttarakhand.
The move is likely to affect the bottom-line of, and discourage investments from, fast moving consumer goods (FMCG) and consumer durables companies that have set up units there to take advantage of the sops available. Dabur, Nestle, Hindustan Unilever, Britannia, Reckitt Benckiser and Videocon, for instance, already have their plants there. If the government does away with these subsidies, industry experts say the cost of companies in these regions could increase by anywhere between 20 and 30 per cent.
“The govenment is exploring the issue as it works towards moving to a uniform goods and services tax (GST) regime. The tax incentives these states got on account of area-based exemption notifications are slated to lapse by March 31, 2010. We are asking for an extension so that the original timeline of 2013 is maintained,” says S C Nautiyal, joint director, industries, Government of Uttarakhand.
The GST move is the reason why the notifications are being sought to be ended by March 2010, instead of 2013.
Companies across sectors such as FMCG, consumer durables, automobiles and pharmaceuticals have set up manufacturing plants in the region to avail of the 10-year tax holiday these states provide to boost industrial development. There are a total of 1,700 units who have invested about Rs 17,000 crore in Uttarakhand since 2003. That was when the Union government first announced a comprehensive package for both Uttarakhand and Himachal Pradesh, permitting a tax holiday of 10 years for those who set up units there before 2013.
The units in Uttarakhand are across sectors such as FMCG, auto, consumer durables and pharmaceuticals. The scenario is no different in neighbouring Himachal Pradesh, where Baddi is a favourite location of most manufacturers, including FMCG ones, on account of its proximity to Chandigarh. In Uttarakhand, there is Hardwar, Rudrapur, Dehradun and Pantnagar, which are manufacturing hubs in the region.
“The exemptions enjoyed by manufacturers in Uttarakhand, for instance, is substantial,” says Shailesh Seth, a Mumbai-based expert on indirect tax, adding: “They enjoy 100 per cent exemption on excise duty for 10 years, and 100 per cent income-tax exemption for the first five years, which tapers over the next five years. There is also an investment subsidy that manufacturers enjoy at the rate of 15 per cent of the total investment, plus an exemption of one per cent on central sales tax.” All these amount to “significant savings” for companies which set up shop there.
Incidentally, the move to reconsider tax benefits does not apply to Jammu & Kashmir which also falls under the area-based exemption notofication, say tax experts. This is because the model adopted by Himachal Pradesh and Uttarakhand for exemption of tax is slightly different to that of Jammu & Kashmir.
“There is no excise duty levied on manufactured goods or the output coming out of Uttarakhand and Himachal Pradesh,” says Pratik Jain, executive director, indirect tax, KPMG. “However, there is excise duty levied on the input used for manufacture, which is treated as a business cost by the producer. In Jammu & Kashmir, the refund model is operational, which means there is an input setoff against the output liability, with the balance paid in cash, which is then claimed as a refund by the manufacturer.”
The first discussion paper on GST, which was released last month by the empowered group of state finance ministers, had proposed that area-based exemptions should be converted into cash refunds. “Jammu & Kashmir already has this model in place. It is states such as Himachal Pradesh and Uttarakhand which don’t. By doing away with area-based exemptions enjoyed by these states, the idea is to get them on one plank with the others,” says a tax expert based in Delhi.