New Delhi: The Bharatiya Janata Party (BJP) government in Uttarakhand has threatened to stage a sit-in in the national capital to pressure the Congress-led Union government into extending a tax holiday for the state and neighbouring Himachal Pradesh that ends this month.

Seeking relief: Uttarakhand chief minister Ramesh Pokhriyal Nishank says the end of tax benefit will result in immigration from the state. Mohd Zakir / Hindustan Times

Congress leaders from Uttarakhand have also put their weight behind the BJP state government, demanding that tax exemptions be continued for another three years.

Analysts said the coercion may force the Union government to extend the scheme for now, but all area-specific tax holidays would anyway end if the government introduces the goods and services tax (GST) as scheduled on 1 April 2011.

Exemptions under the tax holiday vary from product to product, but roughly mean a concession in excise tax in the cost of value addition to the products within state limits.

“The entire cabinet of ours will be in Delhi to seek our right of excise exemption till year 2013," Uttarakhand chief minister Ramesh Pokhriyal Nishank said. “The extension is not only in the interest of the people of Uttarakhand but also for the security and peace of this border state and the country."

“An expiry of the tax holiday would result in a huge immigration of people from the state," he added.

Pokhriyal said BJP-ruled Himachal Pradesh’s chief minister Prem Kumar Dhumal may also accompany him when he meets Prime Minister Manmohan Singh to place his demands.

A 10-year tax holiday was introduced in Uttarakhand and Himachal Pradesh by the BJP-led National Democratic Alliance (NDA) government in January 2003. The Congress-led United Progressive Alliance (UPA) regime, which came to power in 2004, curtailed the holiday to 2007, but later extended it to 2010. The Union Budget for fiscal 2011 makes no mention of another extension.

The Uttarakhand state assembly passed a resolution last week, demanding that the tax holiday be continued, with even the opposition supporting the move.

“We are with the government to demand the continuation of a tax exemption for the state," said Harak Singh Rawat, leader of the Opposition in the state assembly.

“Our party (the Congress) has approached Prime Minister Manmohan Singh demanding the extension and there are positive indications," said Union minister of state for labour Harish Rawat, who is a member of Parliament from Haridwar in Uttarakhand. “People of Uttarakhand are optimistic about it."

A total of 1,967 industrial units worth Rs17,352 crore have been set up in Uttarakhand since the launch of the scheme, providing jobs to 121,811 people, according to the state investment commissioner’s office. The bulk of the investment has been concentrated in Haridwar (840 units), Uddham Singh Nagar (597 units), Dehradun (350 units) and Nainital (79 units).

Auto makers Mahindra and Mahindra Ltd (Rs1,500 crore), Tata Motors Ltd (Rs1,000 crore), Hero Honda Motors Ltd (Rs600 crore), Ashok Leyland Ltd (Rs110 crore) and Bajaj Auto Ltd (Rs150 crore) have invested particularly heavily in the state under the exemption regime.

Investors have proposed to put in another Rs30,024 crore to set up 3,237 units that would employ at least 200,000 people in coming days, said Sudheer Nautiyal, Uttarakhand’s director of industries.

These proposals would be at risk if the tax holiday is not extended, he said.

But Satya Poddar, partner at audit and consulting firm Ernst and Young, said area-based tax exemptions were not helpful in boosting industrialization in neglected parts of the country. “These exemptions encourage a lot of artificial activity in these regions—like (creating a) simple packaging industry for goods produced in some other state. There have also been complaints of already functional industries migrating to these areas without any substantial increase in the total industrial production."

“There are clearly better ways to encourage industries. Political priorities apart, government will have to take a decision against it sooner or later, or it will go away with the introduction of GST," Poddar added.

Neighbours Punjab and Haryana have also complained their industries were shifting base to Uttarakhand and Himachal Pradesh to benefit from the tax holidays.

The total revenue foregone in direct taxes in lieu of the direct deduction of profits of undertakings set up in Uttarakhand was Rs1,543 crore in 2008-09 and Rs1,835 crore in 2009-10, according to the Union Budget.

Sanjiv Shankaran and Samar Srivastava contributed to this story.