A Package Reloaded

Delhi’s incentive package for J&K industry was extended by five more years and part of the manufacturing sector is excited. But the secondary sector ‘cynics’ say the policy makers in the state would require a rational mindset to manage Rs 296 crore that the extension will fetch J&K, reports R S Gull.

Sajad A Kichloo, MoS for Industries and Commerce and Home during a meeting with officials.
Sajad A Kichloo, MoS for Industries and Commerce and Home during a meeting with officials.

It was a huge breather for the state government when the Delhi Commerce and Industries Ministry issued a notification extending the industry specific package for next five years. Since June 2012, when the package expired, it had emerged a huge credibility issue for the state government to manage its extension because it is linked to hard cash and investments directly and to job creation indirectly. The excitement was visible as the Industries Minister Sajjad A Kichloo presided over a meeting in his chambers last week.

Asking his officers to ensure the benefits of the extended package help trigger a change, Kichloo said it must help the state – fighting massive unemployment, to sustain the tempo of attracting new investments. Efforts are underway to offer it huge publicity so that prospective investors in MSME and SSI sector are aware that benefits are still available for adding to the industrial infrastructure.

The extended package has three crucial concessions: Capital Investment Subsidy (CIS) of 15%, interest subsidy of 3%, and 100% subsidy on insurance premium. Bureaucrats at working Department of Industrial Policy & Promotion have, this time, limited the overall ceiling for concessions at Rs 296 crore. There is no plausible explanation for limiting the exposure in anticipation, other than the central policy makers were keen to decide the package at their own level within the ministry and not to send it to the inter-ministerial group of the cabinet that is empowered to decide on offering concessions beyond Rs 300 crore, industry insiders said.

But given the performance of the package in its main decade long run, the anticipated exposure of Rs 296 crore is not bad. Shantmanu, state’s industries commissioner was quoted saying that the overall outgo was around Rs 150 crore and most of it was actually dispensed in the last few years of the package. The package has led to an overall investment of around Rs 3000 crore, he was quoted saying.

But the journey of the package is very interesting. Announced in June 2002, the package started with a 100 percent refund of excise duty for a decade for new ventures and substantial expansion of the existing ones; capital investment incentive of 15 percent within three million rupees ceiling; full reimbursement of insurance premium on capital investment; three percent interest subsidy on capital investment and income tax holiday. All these concessions are in addition to a set of 24 incentives that are available to the industry under the state policy. The package was aimed at helping state create more avenues for adjusting the surging jobless population.

It, however, had no smooth ride at all. It was continuously evolving for good or, as some cynics say, for the worst. See how the concessions changed:

The package provides investment subsidy at the rate of 15% of their investment in respect of new units or additional investment in respect of substantial expansion in the plant and machinery subject to a maximum ceiling of Rs 30 lakh. In January 2011, when barely a year and a half was left for the package, the applicable limits under the scheme were raised to Rs 3.00 crore and Rs1.50 crore for manufacturing and service sector respectively, for new units or subsequent first substantial expansion registered under the MSME Act 2006.

Interest subsidy and full insurance premium remained unchanged throughout. The income tax exemption was for five years which was extended for another five years (ending March 2012) to the tune of 30% for Companies and 25% for units other than Companies.

Excise Duty exemption was a huge factor that attracted non-local investment. Initially, new industrial units and existing industrial units on their substantial expansion operational within the notified estates were entitled to 100% exemption. However, Revenue Intelligence detected a huge fraud involving mint processing units and those involved in copper wires during investigations which led to the changes in the concession in 2008. The exemption was limited to the value addition component only, which was capped at the national average for the particular commodity. Besides, the beneficiaries were asked to pay the income tax on the excise refunds they claimed. It triggered a long legal battle and the apex court finally supported the beneficiaries.

Transport subsidy is something that the systems have been offering since 1971. This is a major facility for the units working far away from the markets. Units getting 90% of the transport subsidy for import of raw material was included in this package. For four years, it worked well till a racket surfaced in this component of the scheme in north east. The facility was not withdrawn but it was restructured in such a way that no unit from J&K state could avail it for six years now.

But when the state government insisted that the package needs to be extended for the larger good of the state, centre did not take the political route. In the last year of the package, Commerce Ministry’s Department of Industrial Policy and

Promotion (DIPP) hired Grant Thornton Evaluation of Industrial Policy

Package of Incentives and it submitted its report in May 2012, a month ahead of package’s completion.

After extensive study of the scheme, Grant Thornton made a set of recommendations for future extensions. It suggested extension if the policy for next 10 years with emphasis on income tax and excise exemptions. It wanted the package to be area neutral because most of the manufacturing units in un-organized sector across Kashmir (not Jammu) function outside the notified industrial estates.

The consultant suggested against making any distinction between thrust and non-thrust industries as long as they are not engaged in activities specified in the negative list. It had also recommended that increased benefits of capital investment subsidy for expansion should either offer good employment or is a major expansion.

Interestingly, the report had traced the uneven benefits across regions with most of the benefits going to Jammu. Information accessed by Kashmir Life from the J&K State Finance Development Corporation (JKSFDC), a fully owned central government entity, which is the nodal authority for releasing the incentives under the package suggests that the total outgo under the scheme has been Rs 143.19 crore. Of this Rs 118.53 crore has gone to Jammu, Rs 25.87 crore to Kashmir and a paltry Rs 1.77 crore to Ladakh.

The best has been the excise refund. Though the overall refunds made are yet to be tabulated by the state office of the central excise and sales tax officials, yet the net claims made and refunded between fiscals 2004-05 and 2010-11 has been Rs 4141.73 crore.

When the central government finally decided to extend the package, it did not accept everything that Grant Thornton suggested. Its extension was sliced by half, area neutrality was rejected. While the excise refund concession has already been extended, by a separate notification as early as 2010, up to 2020, the Income Tax exemption for all the new investments has been withdrawn.

The benefits, under the extended package, will not be available before the unit is in production. Second hand machinery is banned. Interest subsidy is available to new units only. Thrust areas have been expanded but there are lot many areas of activity which is excluded essentially means there is activity-discrimination beyond the negative list.

But it will be area neutrality that will be the bottleneck. The package has tried to manage this issue by listing all the existing industrial estates across J&K besides all those which are coming up. But the problem shall remain because most of the unorganized industrial activity takes place outside these estates, especially in Kashmir. This is perhaps why the state government has not withdrawn its consistent demand that the package should be remodeled to the pattern a similar package for the north-eastern states which is area neutral.

Some of the industry leaders have hailed the package. But Kashmir’s well known industry lobbyist Shakeel Qalander has his reservations. “I do not think I am worried over the anticipation ceiling of Rs 296 crore,” Qalander told Kashmir Life. “The problem is how best this subsidy can be used to create rational and fair industrial activity in areas where the package failed in last 10 years ending 2012.” One option, he would love policy makers to implement is that instead of sticking to the ‘first-come-first-take’ basis, the entire available corpus should be allocated to the districts. This, he believes, will mark and end to one area getting the lions share at the cost of all others.

As head of the Federation of Chambers of Industry of Kashmir (FCIK) Qalander was part of a top committee on MSME that Prime Minister constituted. He says the inadequate follow up to the initiative at different levels is creating a crisis for the industrial activity in Kashmir. “Last time, the MSME task force suggested a Rs 100 crore grant to help units gone sick because of strife revive,” Qalander said, “It is yet to be released because nobody followed it up.” Another decision, he said was a grant of Rs 136 crore for revival of the J&K State Financial Corporation. “Even though the state corporation is better now, the money was never claimed.”

The worst of the policy making, according to Qalnader was in 2010 when Kashmir was given a group of interlocutors and apparently in lieu of it MHA constituted a special task force (STF) in October 2010 to examine the needs of the Jammu and Ladakh region. Planning Commission members Abhijit Sen and Narendra Jadhav led these STFs for Jammu and Ladakh. Both these ended up recommending Rs 496.63 for Jammu and Rs 416 crore for Ladakh. Interestingly, these STFs identified projects, including in industries sector, but asked state to fund them from the state plan!

Qalander says the extended package could follow the same track, if state’s policy makers do not apply their mind and give it a direction. Anybody listening?


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