A note prepared by the planning department has stated that the state will lose Rs 205 crore in revenue if the 7-year sales tax incentive was offered to Indica which comes under the category of a mega project. The note states: "If mega-project incentives, which are meant for backward areas, are extended to A category (Mumbai Metropolitan Region and Pune Metropolitan Region), there is little chance of such industry going outside Mumbai and Pune." The department feels that this will defeat the objective of the Package Scheme of Incentives. In any case, any fresh incentivesshould be considered only under the new 1998 scheme of incentives.

State government sources told The Financial Express that the state cabinet sub-committee headed by chief minister Manohar Joshi discussed the matter on Monday at Nagpur, but failed to reach a decision due to difference of opinion among committee members.

The state finance department has stated that granting incentives in non-backward areas was totally against the concept of backward area development through incentives. "Pune is a developed area with one of the best infrastructure facilities in the country -- both hard and soft infrastructure," states the department.

The finance department has argued that the Indica project is not a case of greenfield investment which needs to be wooed by the state. The project has already been under implementation. The Tatas have so far made an investment of Rs 1,400 crore to produce 1.5 lakh cars per annum and will invest Rs 200 crore by March 1999 and Rs 100 crore by September nextyear.

"Higher incentives to bigger units make smaller investment units unviable, uncompetitive and it does not fit in the economic logic," the note added. This project itself will cost the state Rs 1,500 crore over a 7-year period from other incentives offered. If this project was given an additional benefit in terms of a sales tax exemption, the state would not be able to deny others similar benefits and the loss of revenue to government will be much higher.

The department said that incentives were not a critical input for attracting investments. Economic implications for the state if an auto project was set up in another state were really not negative. "Maharashtra, being a large market for autos, will get substantial tax revenue of at least Rs 400 crore over a period of 7 years as vehicles were covered under entry tax."

The note has also gone a step further and states: "Maharashtra being the most developed state should not be the cause for starting an incentive war, which will put all states in ano-win situation."

INSIGHT
State must weigh options

The sales tax case for the Indica project needs to be handled with utmost care. Maharashtra is fast losing its once preferred investment destination status. Companies like Volvo, Mahindra and Hyundai preferred to set up base in Karnataka and Tamil Nadu, rather than in Maharashtra.

While Maharashtra has failed to retain potential investors, Andhra Pradesh and Karnataka have rolled out the red carpet and taken a proactive stance towards business. This could threaten Maharashtra's pre-eminent status.

However, the flip side to the issue is the fear of setting a precedent in the Telco case. This could be used time and again, causing great loss to the state exchequer. Hence, the state needs to execute a fine balancing act.