The finance ministry has decided to extend a 10-year tax holiday to industries in special category states.

Though the measure was a part of Budget 2003-04, the revenue department had been dragging its feet on the issue. It was apprehensive that the move would lead to company's seeking registration in Himachal Pradesh, Uttaranchal, Sikkim or in one of the Northeastern states to avail of tax exemptions.

Anticipating the notification, several information technology companies (e.g., Wipro) and automobile ancillary companies have already completed preliminary scouting of land in some of these states.

Officials in the state governments of Himachal Pradesh and Uttaranchal said they had already received a large number of inquiries from several industries, especially from the neighbouring states, to set up base there. Both these states expect a big boost to their investment plans because of the tax exemptions.

According to the proposal approved by the Cabinet last year, the revenue department will allow new or existing enterprises in these states a 10-year tax holiday on profits from their investments. This will be done by inserting a new Section 80-IC.

For existing units to qualify for the tax holiday, they will have to make an additional investment of at least 50 per cent in their plant and machinery. The excise department has already given a similar benefit to the states by issuing a notification last month.

The amount of deduction will, however, be reduced from 100 per cent to 25 per cent for enterprises in Himachal Pradesh and Uttaranchal after five years.

Also, the units, which avail of the benefits under Section 80-IC will not be eligible for other tax concessions like export processing etc. The department of industrial policy and promotion has also asked the revenue department to expedite the issue of the notification.

Incidentally, the Vijay Kelkar task force on direct taxes had recommended the abolition of tax exemptions for backward areas as they do not serve the desired objectives.

The report had said that Section 80-IB should, accordingly, be done away with as it had caused serious distortions in economic efficiency, equity and administrative effectiveness.

The task force had instead recommended an expenditure grant.

Tax breaks

• New or existing enterprises in Himachal Pradesh, Uttaranchal, Sikkim or in one of the Northeastern states can avail of tax exemptions
• Several infotech, automobile ancillary companies are now seeking registration in these states
• Kelkar task force on direct taxes had recommended the abolition of these tax exemptions