Political favouritism? Modi govt quietly slipped in a tax sop for Andhra, Telengana in Budget

The Income-tax Act vide section 80-IB confers tax holiday, full or partial, on new industrial units set up in backward states as well as in backward districts.

Backward states are mentioned in it but backward districts are left to be notified by the government of the day at the center. Backward districts that can be notified by the center are divided into category A and B, with the former being treated at par with a backward state and becoming eligible for greater tax exemption vis-à-vis the latter.

The backward states include the entire seven sister states in the north-east and also states like Himachal Pradesh, Jammu Kashmir etc.

There have been jockeying for this hallowed if dubious status in the past with Bihar in particular making no secret of its displeasure at being left out.

In our country there is a perverse premium on backwardness and losses especially from the tax standpoint. At the same time, it cannot be gainsaid that backward states do need a leg up if only to attract investments that in turn provide employment so crucial for development and coming out of the vicious circle of poverty, unemployment, social unrest and lack of development all of which feed on each other. Be that as it may.

The Budget 2015 seeks to give Andhra Pradesh and the recently carved out Telengana a preferential treatment in the matter of additional depreciation.

As it is, all industrial units set up across the country post 2005 as well as fresh investments made in existing factories post 2005 qualify for an additional depreciation of 20% in the year of investment but industrial units set up in backward regions of these two states between April 2015 and April 2020 would be eligible for a 35% additional depreciation.

The idea originally was this tax benefit will give impetus to both capital goods industry in particular as well as to growth in general.

Nothing wrong in it as it is given to everyone. But what is being proposed is just plain invidious. How can the central government play favorites with a particular state or states? Everyone knows the ruling TDP in Andhra Pradesh is an important member of the ruling NDA dispensation at the center and the ruling TRS at Telengana could any day cozy up to the center given its past record of currying favor with the ruling dispensation.

It is obvious that the Narendra Modi government has gone out of the way to confer a special favor on these two states. Eyebrows and hackles are bound to be raised by this clear discriminatory treatment.

The discrimination, of course, would be rationalised on the ground that the two states were the result of balkanization of the combined state but that is hardly the justification for this preferential treatment because if the central government can identify backward regions in these two states why can’t it do the same with respect to all other states?

It is another matter though that Jammu & Kashmir is not the favorite investment destination despite the backward state tag. J&K doesn’t beckon investment because of the terrorism factor but that is not the point. The point is tax benefits should not be politicised.

Another area left open for lobbying and the inevitable politicisation is Section 35AD which grants 100% depreciation to select industries like gas and oil pipeline, cold storage, hospitals with at least 100 beds etc.

Joining this distinguished and esoteric company last year was bee-keeping. There are no transparent guidelines as to which industries can make the grade for this heightened tax benefit so much so that it is susceptible to lobbying.

The government ought to grant 100% depreciation on all capital assets, period. That would put to end all sorts of jockeying. There won’t be much loss of tax revenue in the long run once the upsetting effect of the switch over blows over given the fact that at the end of the day even the depreciation on written down value year after year is going to aggregate to just 100%.

Granted, the immediate grant would have heightened time value for the beneficiaries but let us not grudge that. It is a small mercy. The records and assessment would be less messy.