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`Undue' ST exemptions -- Why is Gujarat bending over backwards?

Vinod Mathew

GUJARAT has been in the race for the past 10 years or so, one in which it has sought to emerge as the most industrialised State. In this endeavour, if it joined other States in the tax discount offers that marked the 1990s, not many eyebrows raised. But some figures of the Gujarat Sales Tax Department and the Comptroller and Auditor General (CAG) report for the year-ended March 2000 brings all these efforts under a cloud.

In 2000-01, the Gujarat Government had the dubious distinction of allowing sales tax waiver of Rs 4,118 crore, the highest such write-off in the country and far more than what Maharashtra, Karnataka, Andhra Pradesh or Tamil Nadu gave away. This was again st the sales tax collected in Gujarat for the year at Rs 5,963 crore.

In other words, the Gujarat Government, whose sales tax receipts for the last fiscal should have been Rs 10,081 crore, waived off over 40 per cent in the name of attracting industrial investment in the State. This year, the first five months saw the Stat e Government write-off Rs 1,734 crore against Rs 4,195 crore it was due to collect.

In percentile terms, this reflects only a marginal rise over the previous year, but with another seven months to go, this figure could considerably worsen. Especially, as the ST Department has set its eyes on an enhanced collection of Rs 6,700 crore for the current year. Which means, the State is headed for another year marked by a huge tax shield which may well pierce the Rs 5,000-crore mark.

As if these were not enough sops to the industry, many corporate heavyweights would appear to have been allowed to work around the various incentive schemes resulting in fiscal advantages over and above those decreed by the state's investment policy. Thi s means a net erosion of Rs 1,188 crore for the State exchequer in 1999-2000, the year that audited by the CAG.

Under the microscope are said to be at least three biggies -- Reliance Industries Ltd (RIL), Essar Steel Ltd (ESL) and General Motors India Ltd (GMI) -- and the unfair advantage that is suspected to have granted to them by the State Industries Department . The list also apparently the likes of Saurashtra Cement Ltd and Shree Digvijay Cement Co Ltd.

An excerpt from the CAG report highlighting the three instances of undue tax favours:

*A manufacturing unit at Surat which was granted ad hoc benefit of Rs 300 crore failed to fulfill the condition of local employment even after six years from the commencement of production;

*A passenger car manufacturing unit at Halol was incorrectly allowed the status of prestigious unit, resulting in excess grant of composite benefit of Rs 128.98 crore;

*Due to incorrect computation of fixed capital investment, a unit at Hazira was given inadmissible benefit of Rs 212.88 crore.

The Sales Tax Department feels that it has done nothing wrong as it was merely carrying out the State Government's directive of not collecting tax from certain companies. According to senior ST officials, the decisions -- to raise the tax incentive eligi bility from 25 per cent to 90 per cent in the case of GMI, to compute interest paid on loan and debentures as part of fixed investment eligible for tax waiver in the case of RIL, and non-induction of local hands even after full utilisation of the allowed tax umbrella in the case of ESL -- were taken by the Industries Department. The Industries Department officials were not available for comment.

The case of GMI is dealt extensively by the CAG. The audited scrutiny revealed that the total investment of Rs 313.90 crore, as certified by the statutory auditor, included Rs 43.96 crore incurred as pre-operative expenses. This contained interest and fi nance charges and management fees capitalised which ought not to have been considered as fixed capital investment.

Since the actual fixed capital investment by GMI was only Rs 269.94 crore, well short of the Rs 300 crore required to grant it the prestigious unit status, the unit was eligible for composite tax benefit of only 25 per cent and not 90 per cent. While thi s resulted in excess grant of benefit of Rs 122.07 crore, an expenditure of Rs 7.68 crore was incurred by the unit (included in the eligible fixed capital investment) for modification of the old factory building purchased from Hindustan Motors. This resu lted in an incorrect grant of tax shield of Rs 6.91 crore, thus taking the out of turn tax umbrella granted to Rs 128.98 crore.

RIL's Hazira unit was granted final eligibility certificate for incentive benefits amounting to Rs 1,161.98 crore. However, the CAG found that Rs 230.47 crore came in the form of interest paid on term loans, and debentures, and Rs 6.06 crore on letter of credit charges. Also a prestigious unit eligible for 90 per cent tax waiver, the RIL was found to have been granted excess tax benefit of Rs 212.98 crore.

Essar Steel, which started commercial production in February 1993, was granted ad hoc benefit of Rs 300 crore which was fully utilised by the company by 1997-end. The company did not fulfill the condition of local employment even by November 1999 despite an undertaking by ESL comply with the condition by March 31.

Clearly, the Gujarat Government has been truly found bending backwards to accommodate big industrial houses under the guise of sales tax exemptions. This at a time when its finances are in disarray, caught in a quagmire of dipping revenue receipts and ri sing expenditure -- both planned and non-planned. With little or no hope of recouping the largesse handed out to the industrial houses, Gujarat may be paying a steep price for staying one step ahead in the investment rat race.