Package Scheme of Incentives in India: Constitutional, Fiscal and Doctrinal Analysis

Package Scheme of Incentives in India: Constitutional, Fiscal and Doctrinal Analysis

1. Introduction

Package Schemes of Incentives (PSIs) constitute the principal fiscal instrument employed by several Indian States, most prominently Maharashtra, to promote regional industrialisation, dispersal of economic activity, and employment generation. Typically anchored in statutory powers conferred by sales tax or value-added tax enactments, a PSI aggregates multiple concessions—sales-tax exemption or deferment, interest-free loans, power-tariff rebates, and capital subsidies—into a single policy framework. Despite their policy salience, PSIs have repeatedly generated complex constitutional, administrative and income-tax controversies, giving rise to a rich body of jurisprudence from the Supreme Court, High Courts and tax tribunals. This article critically analyses those controversies, drawing upon leading authorities such as State of Jharkhand v. Tata Cummins Ltd.[1], Shree Sidhbali Steels Ltd. v. State of U.P.[2], the Special Bench ruling in Deputy CIT v. Reliance Industries Ltd.[3], and the Supreme Court’s “purpose test” elaborated in CIT v. Chaphalkar Brothers[4].

2. Evolution and Statutory Foundations of PSIs

2.1 Maharashtra’s Model

Maharashtra pioneered the concept in 1964 and has successively revised it through the 1979, 1983, 1988, 1993 and 2001 Schemes. Each scheme is implemented through Government Resolutions (GRs) read with exemption notifications issued under section 41 of the Bombay Sales Tax Act, 1959, and, post-2005, section 93 of the Maharashtra Value Added Tax Act, 2002. The implementing agency—originally SICOM, later the Directorate of Industries—issues “Eligibility Certificates” that operate in rem as subordinate legislation[5].

2.2 Rule-Making and Amending Power

Section 21 of the General Clauses Act, 1897 recognises that the power to issue notifications includes the power to amend, vary or rescind them. The Supreme Court in Shree Sidhbali Steels confirmed that this principle applies equally to fiscal incentives; consequently, no vested right precludes the State from altering or withdrawing a PSI, subject only to constitutional limits[2].

3. Constitutional and Administrative Law Issues

3.1 Promissory Estoppel versus Statutory Supremacy

Industrial units frequently invoke promissory estoppel to resist curtailment of incentives. In Sidhbali Steels, the Court held that while estoppel operates against the executive, it cannot “fetter legislative competence” when the withdrawal is authorised by the parent statute and justified by public interest. Earlier Bombay decisions (Olympic Oil Industries[6]) that invalidated retrospective amendments were thereby limited to their facts.

3.2 Retrospective Validation

The Maharashtra legislature responded to judicial invalidation of administrative circulars by inserting section 41BB in the Bombay Sales Tax Act (and later amending section 93 of the MVAT Act). The constitutional validity of this validating device was upheld in Eurotex Industries v. State of Maharashtra[7], where the Supreme Court reiterated that the legislature may retrospectively alter the legal basis of a judicial decision, provided it does not transgress fundamental rights.

3.3 Strict Compliance with Eligibility Conditions

PSIs invariably condition incentives on ownership or long-term lease of the industrial premises. In Tata Cummins, the Supreme Court denied the benefit because the assessee lacked a registered 15-year lease, underscoring that exemptions being in the nature of “exceptions” must be strictly construed[1]. The same principle guided the Bombay High Court in Perfect Foundries[8].

4. Fiscal Characterisation under the Income-tax Act, 1961

4.1 The Purpose Test

The seminal decision in Sahney Steel & Press Works Ltd. v. CIT (1997) formulated the “purpose test” to distinguish capital from revenue subsidies. The test, vigorously reaffirmed in Ponni Sugars (2008) and Chaphalkar Brothers (2017), looks to the object of the subsidy rather than its source, form or timing.

4.2 Application to PSI Incentives

Applying the purpose test, the Income-tax Appellate Tribunal (Special Bench) in Reliance Industries held that sales-tax incentives under the 1979 PSI were capital receipts because their dominant purpose was to induce investment in fixed assets in backward regions[3]. The Bombay High Court dismissed the revenue’s appeal, and the position has since been applied to the 1988 and 1993 Schemes (Clarion Technologies[9]; Cosmo Films[10]).

4.3 Divergent High Court Views and Harmonisation

While the Calcutta High Court in Rasoi Ltd. concurred that a sales-tax remittance aimed at expansion is capital in nature[11], earlier Bombay references such as CIT v. Bajaj Auto Ltd. had treated duty-drawback incentives as revenue receipts[12]. The Supreme Court’s endorsement of Chaphalkar Brothers appears to have settled the controversy in favour of the capital approach where the scheme demonstrably targets capital investment.

5. Doctrinal Themes Emerging from Jurisprudence

5.1 Substance over Form

Courts consistently privilege economic reality over legal form. Thus, exemptions structured as interest-free loans may still be capital in character if the underlying policy is investment promotion (Reliance Industries; Indian Organic Chemicals[13]).

5.2 Balancing Public Interest and Private Legitimate Expectations

The Supreme Court’s readiness to permit withdrawal or modulation of incentives reflects deference to the State’s fiscal autonomy. Yet, the doctrine of arbitrariness under Article 14 remains a safeguard; a withdrawal that is unguided, discriminatory or irrational would falter. The Full Bench decision in Tapti Oil Industries[14] illustrates this balance by compelling the State to honour commitments where industrialists had altered their position bona fide before a cut-off date.

5.3 Federal Dimensions

Because PSIs operate through State taxation powers (Entry 54, List II), inter-State disparities are inevitable. Central schemes—e.g., Section 80-IC deductions—co-exist, creating layered incentives. Judicial analysis, however, remains State-specific, reinforcing the need for assessees to scrutinise the precise wording of each State scheme.

6. Policy Critique

The efficacy of PSIs has been questioned on grounds of revenue erosion, administrative complexity and uneven regional outcomes. The litigation surveyed indicates three systemic concerns:

  • Uncertainty: Frequent amendments (often retrospective) undermine investor confidence.
  • Compliance Costs: Elaborate conditions (lease registration, capacity thresholds, etc.) generate transactional costs and disputes.
  • Evaluation Deficit: Few States publish rigorous cost-benefit assessments linking incentives to sustainable development metrics.

Reforms could include sunset clauses, independent impact evaluations, and a statutory guarantee period insulating incentives from premature withdrawal (subject to force-majeure-like exceptions).

7. Conclusion

The jurisprudence on Package Schemes of Incentives reveals an intricate interplay between statutory drafting, constitutional principles and fiscal policy. While courts have validated State flexibility to re-design incentives, they simultaneously demand strict compliance with eligibility conditions and accord capital-receipt status to genuinely investment-linked subsidies. Legislatures and policymakers must therefore craft PSIs with precision, transparency and empirical rigour to reconcile industrial-development objectives with constitutional and revenue imperatives.

Footnotes

  1. State of Jharkhand and Others v. Tata Cummins Ltd. and Another (2006) 4 SCC 57.
  2. Shree Sidhbali Steels Limited and Others v. State of Uttar Pradesh and Others (2011) 3 SCC 193.
  3. Deputy Commissioner of Income-tax v. Reliance Industries Ltd. (2004) 88 ITD 273 (SB) affirmed in CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom).
  4. Commissioner of Income Tax-I v. Chaphalkar Brothers (2018) 13 SCC 358.
  5. Entry 136 of Notification under s.41, Bombay Sales Tax Act, 1959; see also M/s Jindal Poly Films Ltd. v. State of Maharashtra (2013) Bom HC.
  6. Olympic Oil Industries Ltd. v. State of Maharashtra (1986) SCC OnLine Bom 402.
  7. Eurotex Industries & Exports Ltd. v. State of Maharashtra (2017) 5 SCC 659.
  8. Perfect Foundries Pvt. Ltd. v. State of Maharashtra (1996) Bom HC.
  9. Clarion Technologies Pvt. Ltd. v. DCIT (2015) ITAT Pune.
  10. DCIT v. Cosmo Films Ltd. (2011) ITAT Delhi.
  11. CIT v. Rasoi Ltd. (2011) SCC OnLine Cal 1382.
  12. CIT v. Bajaj Auto Ltd. (2009) SCC OnLine Bom 2171.
  13. Indian Organic Chemicals Ltd. v. Union of India (1978) Delhi HC.
  14. Tapti Oil Industries & Anr. v. State of Maharashtra (1983) SCC OnLine Bom 175.