Chennai: The Tamil Nadu government has asked the Centre to adopt a cautious approach on the 'complex issue' of providing area-based tax exemptions in the backdrop of the Andhra Pradesh State Reorganisation Act, 2014, saying such sops could affect the neighbouring state.
Chief Minister J Jayalalithaa has told Prime Minister Narendra Modi that the Centre has made a term of reference to the 14th Finance Commission on making recommendations on the resources that would be available to the successor or reorganised states on reorganisation of Andhra Pradesh in accordance with the Andhra Pradesh Reorganization Act, 2014.
It promised appropriate fiscal measures, including offer of tax incentives to promote industrialisation and economic growth in both the states, she said.
In a letter to Modi dated August 24, which was released on Monday, Jayalalithaa said that as a neighbouring state, Tamil Nadu did not 'begrudge' benefits given to the two states, but the "nature and type of concessions have not been indicated in the Act and the matter appears to have been left to the discretion of the Government of India."
"The Andhra Pradesh State Re-organisation Act, 2014, already contains a substantial and significant economic package. Hence, I strongly urge you to adopt a cautious approach to the complex issue of providing area-based tax concessions in the name of encouraging economic development in these two states."
"Such exemptions run counter to one of the basic thrusts of economic reforms a rational tax policy that is neutral, encourages a common market in the country, rewards competitive efficiency, and exploits comparative advantage. Any shift of investments from states with a strong infrastructure and trained manpower to other states motivated by tax reliefs alone would undo the two decade long work of rationalization of tax structures," she said while expressing her government's 'apprehensions' on the matter.
The CM recalled there was a 'spirited' debate on this issue at the National Development Council meet in 2005 during the UPA regime when 'almost all' Chief Ministers had favoured scrapping such exemptions as 'they significantly distorted the investment decisions of companies and corporate houses.'
Jayalalithaa said independent analysis has acknowledged that the area-based exemption scheme was not calibrated properly and did not take into account the possibility of flight of capital and relocation of units from other States in the country.
"Any extension of such area-based concessions to Andhra Pradesh or Telengana would cause a huge flight of capital and relocation of industries, in particular from neighbouring States," she said.
It would also make neighbouring states totally uncompetitive, she said, adding such concessions to new industries would render existing ones, both in neighbouring states and even in states where such concessions are granted, completely uncompetitive.
Such 'grave risks' cannot be ignored, Jayalalithaa argued.
Citing the statement of Revenue presented by the NDA government along with its budget in July, she said the revenue foregone in 2013-14 was Rs 9267.50 crore in direct taxes and almost Rs 18,000 crore in excise duty from such area-based tax concessions.
These monies could have been shared with the state, she said, adding if a similar concession was extended to the successor states of Andhra Pradesh or Telengana, the fiscal impact would be substantially greater, 'given the much larger size of the States and the fact that these states have a fairly well developed infrastructural base.'
Jayalalithaa recalled that during creation of Jharkhand and Chattisgarh, neither these two nor residual states of Bihar and Madhya Pradesh received any such fiscal incentive.
Even the time-bound exemption like one given to Kutch area in Gujarat after the 2001 earthquake was not extended to her state following the 'catastrophic tsunami' in 2004 by the then UPA government despite adequate justification, she added.
"Despite having put in place sunset clauses on area-based exemptions during their two terms in office, the previous UPA government, on grounds of sheer short-term political expediency expediency, offered this vaguely worded promise of taking appropriate fiscal measures, including distortionary tax incentives. This reflects the moral bankruptcy of the previous UPA Government."
"Your Government must exercise the greatest care in approaching this issue. Nothing should be done which would distort economic incentives or a level-playing field and render states like Tamil Nadu uncompetitive vis a vis their neighbours. It would be highly ill-advised to offer across the board area based-tax concessions," she said.
