The Punjab government is all set to file a special leave petition (SLP) in the Supreme Court challenging the constitutional validity of tax holiday schemes announced by the central government in some states without compensating the affected states. Punjab chief minister Prakash Singh Badal is learnt to have given his green signal for challenging the central government's action and the SLP will be filed any time now.

Sources said that Punjab has been toying with the idea of moving the apex court on the issue for some time as the state is upset with the tax holiday schemes because it has witnessed a mass exodus of industries from Punjab to the neighbouring states to take advantage of the tax benefits which resulted in draining of state exchequer. The central government in 2002 had announced hilly states like Himachal Pradesh, Uttarankhand, Sikkim and J&K as tax holiday states to attract the industries to these industrially backward states.

As the industries migrated to neighbouring Himachal Pradesh and J&K, the financial position of otherwise industrially rich Punjab became worse and in the industry graph its position slipped sharply to 15th position from the second position at one point of time. Gujarat was at number one position in the chart.

Though the Punjab government is challenging the tax benefits to all industries, it will definitely have a bearing on the pharmaceutical industry as a large number of pharma units, not only from Punjab but also from different parts of the country, have migrated to these tax holiday states. If the tax holiday schemes are challenged, it will affect hundreds of pharma units set up in these states, especially areas like Baddi in Himachal Pradesh which has become the biggest pharma hub of the country.

Sources also said that some of the NGOs working in the field of health may also join the Punjab government in challenging the tax holiday schemes. The NGOs are up in arms against the tax holiday schemes as they believe that one of the main reasons for soaring prices of medicines in the country is the excise free zones. As there is no deterrent of excise duty, the manufacturers fix the MRP of medicines as per the convenience of the industry.

The prolonged tussle on the withdrawal of tax sops to contract drug manufacturers in the excise-free zones may soon land in the court rooms, with the Punjab government actively planning to move the Supreme Court against blanket tax holiday schemes in some states.

Hit hard by the migration of industries to the excise-free zones in the neighbouring states, the Punjab government is in the advanced stage of filing a petition in the Apex Court seeking to nullify the tax holidays, it is learnt. The proposal, describing the tax benefits as unjust and claiming damages for the loss, has already been sent to the Centre for clearance, sources said.

Punjab is one of the worst affected states by the tax holiday schemes as a large number of industrial units shifted base to neighbouring Himachal Pradesh where 10-year-tax holiday had been given to the units. The position of the state in the industry graph has slipped sharply to 15th position from the second position at one time. Pharmaceutical industry, especially the small and medium scale sector, has been one of the more affected segments due to this mass exodus of manufacturers.

Commenting on the development, a spokesman of the SME Pharma Industries Confederation (SPIC), which has been pushing for withdrawal of tax exemption given to the contract manufacturers for a level-playing field, said they would also consider joining the case if Punjab government goes to the court.

A proposal, endorsed by the Economic Advisory Committee to the Prime Minister, to limit the tax exemption only to those contract manufacturers who produce drugs under own licence has been pending with the Finance Ministry for long now. The proposal was shelved in view of the elections in Uttarakhand and Himachal Pradesh, the two prominent tax-holiday destinations in the country. Recently, the Finance Ministry withdrew tax benefits to the peripheral industrial units in these states and it was viewed as an indicator to finally rolling back excise exemption to the contract manufacturers.

With the pharma industry vertically divided on the lines of tax-free and non-tax free zones, both the sides have been lobbying aggressively for their causes. While, the industry outside the excise-free zones wanted some level-playing field to survive, those in the zones backed up by the big players wanted the sops to continue and believed that the Centre could not roll it back easily as it involved complex legal issues.

With the Punjab government looking serious to move the court, the tussle will now enter a new stage and the verdict of the Apex Court would definitely have far-reaching impacts on the industry in general.