Tamil Nadu Chief Minister Jayalalithaa cautioned Prime Minister Narendra Modi on offering across-the-board area-based tax concessions to Andhra Pradesh and Telangana.
Calling upon the Union government to “exercise the greatest care” in approaching the issue, the Chief Minister, in her letter written on Sunday, stated that “nothing should be done, which would distort economic incentives or a level-playing field and render States like Tamil Nadu uncompetitive vis-a-vis their neighbours. It would be highly ill-advised to offer across the board area-based tax concessions.”
Ms. Jayalalithaa’s letter to Mr. Modi was made public some hours before Andhra Pradesh Chief Minister N. Chandrababu Naidu was scheduled to meet the Prime Minister in New Delhi and discuss several issues, including the grant of special category status.
Her letter was in the context of reports regarding the Union government making an additional term of reference to the 14th Finance Commission, regarding making recommendations on the resources that would be available to successor States on the reorganisation of Andhra Pradesh. She also referred to reported demands from certain quarters that area-based tax concessions should be provided to Andhra Pradesh and Telangana.
Qualifying that “as a neighbouring State, we do not begrudge the benefits” sought to be conferred on Andhra Pradesh and Telangana for their development, she drew the attention of the Prime Minister to a clause in the Andhra Pradesh Reorganisation Act which promised tax concessions to the two States to promote industrialisation and economic growth. The nature and type of concessions had not been indicated in the Act and “the matter appears to have been left to the discretion of the Government of India,” she said.
Pointing out that the Act itself contained a substantial and significant economic package, she wanted Mr. Modi to adopt a “cautious approach” to the complex issue of providing area based tax concessions in the name of encouraging economic development in the two States. “Such exemptions run counter to one of the basic thrusts of economic reforms — a rational tax policy that is neutral, encourages a common market in the country, rewards competitive efficiency, and exploits comparative advantage.”
She gave an account of the rationale behind taxation reforms in the last 20 years which were directed towards rationalisation and simplification of various exemptions. The Centre had also attempted to reduce and eliminate various exemptions. She recalled she, in August 2005, sought withdrawal of area based exemptions from income tax and central excise for new industrial units located in parts of Himachal Pradesh (HP) and Uttaranchal or Uttarakhand. Any extension of such area based concessions to Andhra Pradesh or Telangana would cause a huge flight of capital and relocation of industries, in particular from neighbouring States, Ms Jayalalithaa apprehended, adding that the exemptions were also fiscally “very expensive.”
Andhra Pradesh or Telangana could not be compared with Uttarakhand, which was equated with Himachal Pradesh, another hill state with issues of difficult terrain and remoteness. Himachal Pradesh had already been categorised as a special category state on a par with the northeastern States, Jammu and Kashmir and Sikkim. Also, while an area based exemption was granted for three years for the Kutch area of Gujarat in 2001 soon after the devastating earthquake, no such concession was provided by the then UPA Government to Tamil Nadu after the 2004 tsunami even when adequate justification existed, she said.
Ms Jayalalithaa expressed the hope that Mr Modi would “definitely consider all aspects of this issue and ensure that the interests of neighbouring States like Tamil Nadu are fully protected while taking a final decision.”
