File photo of Tamil Nadu CM J Jayalalithaa.
Tamil Nadu Chief Minister J Jayalalithaa has urged the central government to decide on area-based tax incentives to Andhra Pradesh and Telangana in a way that would not render neighbouring states uncompetitive for investments.
In a letter to Prime Minister Narendra Modi on Sunday, the text of which was released to the media today, she said: "The Andhra Pradesh State Re-organisation Act, 2014, already contains a substantial and significant economic package."
"Hence, I strongly urge you to adopt a cautious approach to the complex issue of providing area-based tax concessions in the name of encouraging economic development in these two states."
According to CM Jayalalithaa, area-based tax incentives run counter to one of the basic thrusts of economic reforms, a rational tax policy that is neutral, encourages a common market in the country, rewards competitive efficiency, and exploits comparative advantage.
"Your government must exercise the greatest care in approaching this issue.
Nothing should be done which would distort economic incentives or a level playing field and render states like Tamil Nadu uncompetitive vis a vis their neighbours. It would be highly ill-advised to offer across-the-board area-based tax concessions," Ms Jayalalithaa urged Mr Modi.
While stressing that Tamil Nadu does not begrudge the benefits that are sought to be offered to the two neighbouring states, she said the type of tax concessions appears to have been left to the discretion of the central government.
Apprehending that area-based tax exemptions would lead to flight of capital from neighbouring states, the chief minister said it was also fiscally expensive.
She said the central government has indicated that the total revenue forgone through such area-based tax concessions during 2013-14 was Rs.9,267.5 crore in direct taxes and around Rs.18,000 crore in excise duty.
"It must also be pointed out that when a bifurcation of three states took place in 2000, neither Jharkhand and Chattisgarh, two of the newly-created states nor the residual states of Bihar, Madhya Pradesh and Uttar Pradesh received any such fiscal incentive," Ms Jayalalithaa said.