The finance ministry is likely to do away with area-based tax concessions in Budget 2007-08. This will jolt Himachal Pradesh and Uttaranchal, which have attracted huge investments to the consternation of neighbours Punjab and Haryana.

A finance ministry official said, With no other means of enhancing revenues, we will need to contain the number of area-based exemptions. Such benefits to industry had cost the exchequer Rs 1,500 crore in 2004-05.

The finance ministry was planning to restrict the number of tax exemptions for Uttaranchal and Himachal Pradesh, which were extended up to 2007-08, while withdrawing several indirect tax sops.

The move would put these two states at par with their neighbours. After the Budget, new units and expansion by existing units in Uttaranchal, Himachal and Kutch in Gujarat would not be eligible for tax breaks.

The Centre was in a bind after Punjab and Haryana sought similar incentives to prevent existing industries in these states from shifting to Himachal and Uttaranchal. They claimed that exemptions had turned Baddi, an industrially-backward area in Himachal, into a pharmaceutical and textile hub, while auto companies now preferred Uttaranchal.

NO FREE LUNCH
Area-based tax benefits cost the govt Rs 1,500 cr in 04-05
Punjab, Haryana sought incentives similar to HP, Uttaranchal
Sops to J&K and the Northeast likely to be retained
 
Even Gujarat and Tamil Nadu wanted the ministry to do away with area-based sops having lost a number of pharma investments in their region to the two hill states.

Industries in the two hill states enjoy a number of sops, including a ten-year excise holiday and 100% income-tax waiver for the first five years. Besides, new units can also avail of a 15% capital investment subsidy on a maximum of Rs 30 lakh.

The government was, however, likely to retain the sops offered by Jammu & Kashmir and the Northeastern states because of their special status. The move to axe area-based exemptions is in line with the ministrys intention to prune tax sops so that deficit targets could be met.