It will further erode the cost advantage of post-quake units in the district

One man's meat is another man's poison, goes the saying. The Union government's third stimulus package, announced on Tuesday in the form of two per cent cut in excise duty and service tax, to boost the economy may turn out to be exactly that for the industries set up in Kutch district at an investment of Rs24,000 crore after the devastating earthquake of 2001.

"We will be ruined by this reduction in excise as we are no longer competitive with the older units located outside the district. We have, therefore, decided to meet the Union finance minister in the first week of March to plead for a special survival package for the new Kutch industries," said Nimesh Phadke, secretary of the Federation of Kutch Industries Association (FOKIA), on Wednesday.

After the quake, the Union government, in an attempt to rebuild the economy of the district, had announced a waiver of excise duty for five years to the units set up in the district till March 2004. This tax holiday had attracted a large number of units to the district. Phadke said they now wanted extension of the tax holiday for five more years so as to make good their losses.

Explaining the issue, he said the excise duty was at 16 per cent when the tax holiday was announced in 2001. The new industries had based all their calculations on the basis of tax holiday. These industries got a jolt when excise duty was reduced to 14 per cent in 2007 and to 10 per cent in 2008. With the Tuesday's cut of two per cent to 8 per cent, the tax advantage of Kutch-based industries had cumulatively gone down by half. When the excise duty was pegged at 16 per cent, the goods produced in post-2001 Kutch units were available at a cheaper price compared to those produced elsewhere as the Kutch units did not have to pay any tax, he pointed out.

Citing a theoretical example, he said that goods produced in a unit, say in Sabarkantha, would now become more competitive, or even cheaper, compared to Kutch units on two counts: lower transport and establishment cost and lower excise duty of eight per cent. In other words, the Kutch industries had virtually become at par with those in other parts of the state. Phadke pointed out that establishment cost in Kutch was higher as skilled people had to be attracted and retained by paying them a salary three times higher than that in other areas.

He said the annual turnover of new Kutch industries is Rs75,000 crore. The two per cent excise cut meant that they will suffer an erosion of competitive advantage to the extent of Rs1,500 crore.

No stimulus it is

Establishment cost in Kutch was higher as skilled people had to be attracted and retained by paying them a salary three times higher than that in other areas

Annual turnover of new Kutch industries is Rs75,000 crore. The two per cent excise cut meant that they will suffer an erosion of competitive advantage to the extent of Rs1,500 crore.

When the excise duty was 16 %, the goods produced in post-2001 Kutch units were available at a cheaper price compared to those produced elsewhere as the Kutch units did not have to pay any tax

DV Maheshwari/ DNA-Daily News & Analysis Source: 3D Syndication