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The recent increase in the Value-Added Tax on most of the products consumed by the people of Tamil Nadu is an inevitable outcome of a flawed industrial policy.
Inadequate infrastructure in Tamil Nadu — be it power, coastal or rail movement of raw material or finished products, as the case may be, to and from a manufacturing hub — has added to production costs. Besides, the poor quality of distribution is causing units to suffer low capacity utilisation.
If these are set right, the State will easily be able to attract the best of investment. Instead, Tamil Nadu is trying to lure investments by offering gifts. New units not only enjoy VAT exemption but also get back the VAT paid on inputs used in the manufacture. In addition, the new industries get subsidised and uninterrupted power, even as the State utility (TNEB) buys power at high cost during peak hours and at other hours of the day.
Loss of revenue to State
The new industries, thus created, have cost the Government huge sums of monies without contributing to tax revenues (VAT) for several years. To compound matters, by virtue of enjoying uninterrupted supply of power in a power-starved State, they have also ensured that existing VAT-paying units get closed down or run at low levels of capacity utilisation to release additional power required by the units that are coming up with the guarantee of uninterrupted power.
The net result is an inevitable loss of revenue to the State, as the tax-paying units are reducing their utilisation to give power to non-tax paying units.
About 15-20 per cent of the workforce of the new units are in lucrative jobs. The consumption of various goods and services by this class of employees must generate tax revenues. Equally, these units also end up generating jobs for the rest (80-85 per cent) at such meagre wage levels that few from the State find worthwhile to take them up. The units thus end up attracting talent from far-off regions, where the economic situation is direr than those in the State. The skewed industrial investment policy regime is perhaps Tamil Nadu's contribution to national integration.
Address infrastructure deficit
While framing industrial policies, it would be best to address the infrastructure deficit, which will automatically push up industrial activity in the State across the board. The achievement of full utilisation by existing tax-paying units will automatically augment the States' finances.
Moreover, once the issue of infrastructure deficit is addressed, Tamil Nadu will become the most attractive investment destination, without the State having to offer tax exemptions. The additional output will generate even greater revenues for the State.
(The author is CMD, Loyal Textiles.)
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