The curtain has finally come down on the popular tax exemption scheme in the hill states of Himachal Pradesh and Uttarakhand that had drawn millions in investments from a range of industries such as pharmaceuticals, FMCG and automobile.

A number of companies, including Hindustan Unilever, makers of Dove and Lifebuoy soaps, and motorcycle maker Hero Honda have invested in the two states.

Despite the intense political pressure and lobbying from these two states that have non-Congress governments, finance minister Pranab Mukherjee allowed the tax holiday to lapse as he looks to clean up the exemption-ridden tax regime in run-up to the launch of a comprehensive goods and service tax regime.

The governments of these states had written to the prime minister and finance minister and had also lobbyied with the Planning Commission for an extension of these sops.

Henceforth, new investments in these states will not be eligible for 100% excise duty holiday provided as a part of the industrial development package for the uplift of these industrially backward states.

However, all investments made until March 31, 2010, will continue to enjoy the benefit for another 10 years.
This tax holiday has come under severe criticism for reasons such as misuse, flight of capital from neighbouring states and skewed development in these states.

The Union finance ministry had tightened the eligibility norms for availing excise exemption in these states to ensure only companies carrying genuine manufacturing activity enjoyed the benefit. Companies merely labelled, packaged or did sorting instead of manufacturing were no longer eligible for the tax holiday.

The Centre incurred a revenue loss of over Rs 10,000 crore in the current financial year on account of area-based exemption that is available to states such as Jammu & Kashmir and north eastern states.

With comprehensive indirect tax reform, goods and services tax (GST), on its way, both the Centre and states are looking at replacing the complete duty exemption with a tax refund scheme. The empowered committee of state finance ministers had also recommended replacing area-based and industry-based exemptions with direct subsidy.