The Hindu Business Line : `Special entry tax hurting investments in Karnataka'

A LEADING machine tools unit in the small and medium enterprise (SME) sector has deferred its investment for expansion till the value added tax regime is ushered in next year.

Another unit in the sector, with a vendor tie-up for the supply of component to a multinational company, has shut down losing a flourishing business. The grim situation resulting from the Karnataka Government's levy of special entry tax (SET) has forced several units to face a similar fate.

Of the total 3.1 lakh registered units in the SME sector, 20 per cent or 62,000 units have shut down already due to various reasons.

But with the SET increasing the tax incidence to as high as 20 per cent on diesel, fused by captive power generation units and the rates ranging from 13.8 to 20 per cent on various other inputs used by construction , cement and IT sectors, Karnataka has become a high cost manufacturing centre, said Mr K.K. Swamy, Chairman of the Confederation of Indian Industry , Karnataka.

CII, which expected the Government to announce a change in its decision on SET, following its representation, had not received any indication so far.

Addressing a press conference here on Monday, Mr Swamy urged the Government to restore the status quo to prevent Karnataka from gaining the impression of being an "investor-unfriendly State."

In a presentation, Mr Swamy said the State, which was the second most attractive destination for foreign direct investment, with 10.8 per cent of total share of the country's foreign investments of India, was fast losing its advantages.

Industry was already faced with poor infrastructure, andcompetition will be intensifying with the WTO agreement and Free Trade Agreements with Thailand coming into place. SET will only aggravate the situation with even the low-profit marketing of three to seven per cent also vanishing. This would push more units towards closure, he said.

The new levy introduced in the Budget this year, has brought 23 commodities under its bracket. It affects the industry across the board, as it includes cement, diesel generator sets, tyres and tubes, IT hardware and software and components sourced from outside for construction equipment.

Mr Swamy said Karnataka had the potential to maintain a 10 per cent growth in its gross State domestic product with a strong agricultural and industrial sector accelerating exports. He said SET could not only result in flight of capital, but also affect future investments.