In a major decision, all the states have decided to hand out cash compensation to companies against phase out of sales tax exemptions following their transition to a value added tax regime from April 1.

Big multinationals like Ford, Hyundai and PepsiCo which set shop in designated industrial locations across states can now expect that the commitments made by the states while eliciting investment would be honoured.

According to government officials involved in the exercise, the quantum of cash compensation would be based on the savings accrued in the past by the companies due to the tax breaks.

For instance, if a company enjoyed sales tax holiday for five years under a 15-year incentive scheme, it would be reimbursed for the projected monetary loss due to phase-out of the exemptions for the balance 10 years.

A senior official said, "The payout can be in the form of annual installments or as an upfront payment."

"The compensation would be limited to sales tax exemptions only and the general formula for reimbursement of units has been agreed to by all states. The fine tuning of the compensation package has been left to the individual states."

Sales tax incentives were used by states to attract investment in economically backward regions. They were expected to compensate industry for higher capital and operating costs incurred due to locational disadvantages.

The incentives included exemption for a specified period or deferred payment of sales tax.

The continuation of such incentives post-VAT implementation posed a problem as the set-off chain would break every time a unit availed of exemption.

Under VAT, a set-off would be provided for tax incidence at the previous stage of the chain.