Those who may get affected include Videocon Industries, Nestle, Hindustan Unilever, Dabur and Reckitt Benckiser among others who have manufacturing units in Baddi (Himachal) and also in Haridwar, Rudrapur, Dehradun and Pantnagar in Uttarakhand.

However, according to official sources, the move is aimed at bringing all states under the uniform regime of the Goods and Services Tax (GST) which the government is trying to implement from April next year. “The government is also considering giving special tax incentives to states like Bihar and Orissa which will enable them to attract companies to set up manufacturing units,” a senior official said. The balanced approach is aimed at maintaining a neutral position that does not target the BJP-ruled states alone, sources said.

Venugopal N Dhoot, chairman, Videocon Industries said: “Yes, we hear that the special tax incentives to Himachal and Uttarakhand will be withdrawn soon. This will certainly push our cost upwards. But the quantity of rise in cost and the overall impact remains to be seen”.

These special tax and central excise concessions were provided to the states of Himachal Pradesh and Uttarakhand in early 2003 for a 10-year period to attract investments in the industrial sector.

Special benefits for industries located in these two states include a 100% outright excise duty exemption for a period of 10 years from the date of commencement of commercial production, a 100% income tax exemption for the initial period of five years and thereafter 30% for companies and 25% for other than companies for a further period of five years. Also, all new industries in the notified location are eligible for capital investment subsidy at 15% of their investment in plant and machinery, subject to a ceiling of R30 lakh.

Experts say the withdrawal of the special tax breaks may not be all negative. “From a logistics point of view, both these are hill states, far away from ports. Once the taxes are removed, companies will move to other parts. Also, the adverse impact of the move will be felt more by B2B firms involved in the manufacturing of spare parts and heavy machinery, rather than on FMCG firms,” says Anand Ramanathan of KPMG Advisory.

FMCG firms tend to outsource a lot of their manufacturing while supporting and managing it from the outside. “In the short-term, there may be a small price escalation in case of FMCGs. But in the long-term there may not be a very grave negative impact of the move,” Ramanathan said.

Source: Financial Express, India,  dated 14/09/2011