The government’s move to offer fresh excise duty exemptions to companies already enjoying a tax holiday in Himachal Pradesh and Uttarakhand is blatantly wrong. It does damage to the goal of having a harmonised goods and services tax, to the economic prospects of neighbouring states and to parliamentary propriety.

Exemptions spell arbitrariness and patronage, distort the tax structure, do untold damage to government finances and should, therefore, be shunned. However, economic logic has given way to political compulsion. The 10-year excise holiday to these two states ended on March 31 this year.

Ten months later, the government has now allowed excise duty exemption to companies running factories there on fresh investments or capacity expansion or even launch of a new product line in their existing plants. The claimed rationale is that companies have stopped expanding their operations in these two states after March 31. This is absurd.

The question of extending fresh sops to companies already enjoying a holiday simply does not arise after the government ends the tax holiday. The clarification by the Central Board of Customs and Excise clearly shows that the government has not been able to take on pressure groups.

Even so, any clarification could have waited till next year’s budget. The government has sent out a wrong signal and will come under pressure to dole out more sops including commodity sector specific concessions in the coming Budget. It would kill the spirit of simplification and uniformity that has been guiding the path of indirect tax reform.

Tax exemptions will unleash rate-wars among states and hamper the move to have a harmonised goods and services tax countrywide. The model goods and services tax, recommended by the Thirteenth Finance Commission, allows for no exemptions other than a small common list that includes health and education.

The government should try to implement the Finance Commission recommendations with the concurrence of states. Any deviations should be by consensus, after consultation with the empowered committee of state finance ministers. The present unilateral move should be taken back.

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