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Taking the state for a ride

Post-liberalisation, states were aggressive in attracting mega investments. There was also the prospect for setting up ancillary units. There were intense competition and race-to-the-bottom incentive wars. In the automobile sector Maharashtra, Haryana and Tamil Nadu indulged in such competition.

Maharashtra, the leader, was among the first to offer complete exemption from sales tax spread over years. In the initial years, the state provided for refund of sales tax even on cars sold outside the state. The manufacturer merrily enjoyed fabulous tax refunds which, in many cases, proved larger than the total investments they made!
We cautioned Tamil Nadu after it won the Ford Motor project that marked a significant watershed in the state’s industrial development. The IE cover story mentioned: Jayalalithaa wins Ford – but after race-to-the-bottom incentive wars.
It’s true. The company brought in state-of-the-art concepts in constructing sprawling production facilities, management systems, the evaluation and appointment of vendors and their social concerns, apart from direct and indirect employment in thousands.


The concessions were humongous. Nil sales tax for 14 years, 1 per cent tax on components procured from within the state and guaranteed power from the grid. There was a provision to accumulate the sales taxes saved for 14 years, keep these interest-free and repay over the next 14 years. The government also agreed to provide hundreds of acres of land needed for the mother plant and ancillaries at attractive prices.
The understanding was that the concession would be available on cars sold within the state. (Tamil Nadu was estimated to account for less than 10 per cent of car sales in India).


Korean leader Hyundai Motors found these terms attractive. With electrifying speed, it chose Tamil Nadu and set up sprawling facilities at Sriperumbudur. It also helped in setting up 140 ancillary units in the neighbourhood, most of these Korean firms. It commenced production in just two years, a year ahead of Ford and its small car Santro was a runaway success.
Both these two companies seemed to have stuck to the letter and spirit of the concessions offered.


Attracted by the incentives, nearly a decade later, in 2010, the French-Japan conglomerate Renault Nissan (R-N) set up joint facility at Oragadem. The attractive incentives were supplemented by several infrastructure attractions of Chennai metro like major ports, copious educated workforce, education and health facilities for staff….
In quick time R-N set up production facilities for cars for global markets.


The globally acclaimed leader Carlos Ghosn heads Renault-Nissan. Impressed by the frugal engineering genius of India, exemplified by Rata Tata’s Nano car, he launched with remarkable speed the small car Kwid from Renault.
Celeris Technologies, headed by Dr V Sumantran who created such classics as Tata’s Ace, Magic, Nano, Aria… and Ashok Leyland’s Dost, with a team of designers and engineers of Ashok Leyland (which had collaborated with Nissan) developed Kwid at a modest shed in the Guindy Industrial Estate. The wonder kid, Kwid, had 98 per cent indigenous content even at the start, was priced low; it met with good sales right from the launch. It’s twin, Redi-GO at Nissan is also popular.


Unlike Ford and Hyundai, R-N made a crafty interpretation of sales tax concessions. It sold the entire production to Renault Motors and Nissan Motors and claimed the sales tax concession for its entire sales in India. This claim was blatantly against the spirit of the agreement.
Worse, there were reports on other crafty claims: the two companies reportedly claimed refund of sales tax also on cars transferred to other states. With the reduction of the CST from the initial 4 per cent to 2 per cent, this meant another arbitrage of around 10 per cent!
The sales within the state of R-N are not high, and this claim at two levels had severely impacted the revenues of Tamil Nadu. With a substantial volume of the production going for exports, which are anyway exempt from sales tax, Tamil Nadu seems to be funding the entire investment of R-N!
The state amended the law with retrospective effect and passed a government order that such refunds cannot be made on sales made in other states and denied the refunds. R-N sought international arbitration. Since the dispute related to Tamil Nadu, the issue was taken by the government to the Madras High Court. R-N questioned its jurisdiction, but ultimately it was overruled. ‘
It is indeed surprising that such simple concepts of sales within a state for concessions could be interpreted so differently ! Surely, Ghosn’s expert finance managers should be aware of the spirit of the concessions offered. How easily they had taken the state for a ride!


The experience of Maharashtra and Tamil Nadu in concluding deals with European automobile manufacturers hasn’t been beneficial to the extent expected. It has valuable lessons for other states keen to attract mega investments. It appears AP Chief Minister Chandrababu Naidu has offered generous incentive package for Korea’s Kia Motors, on the lines of Tamil Nadu. He would do well to look at the fine print again.
In addition to the crafty interpretations, new complications are arising out of the GST system. Now input credits would be available at the consumption end. This means the dozens of ancillary industries that may be set up afresh in Andhra Pradesh may not get for the state the advantage of input credit as the state on its own may account for sales of less than 5 per cent the total production of Kia vehicles. – SV

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