Tax concessions in Uttarakhand are encouraging auto majors from Hero Honda to Tata Motors [Get Quote] to shift a larger part of their manufacturing to the state to counter rising raw material costs and increase their flexibility to offer consumers cheaper models in a competitive market.

Coming under the 'hilly area' definition, the state offers 100 per cent central excise duty waiver (compared to 14 per cent in other states), a 100 per cent income tax exemption for the first five years, and central sales tax at only one per cent for five years (compared to 2 per cent in other states).

Hero Honda, the world's largest two-wheeler manufacturer, has said it will save more than 10 per cent on tax following a gradual scale-up in production at its plant in Haridwar and a subsequent cut in output at Gurgaon and Dharuhera. The effective tax burden on a product will be calculated at 22 per cent against 31.5-32 per cent earlier.

"We will try to derive maximum benefit from our Haridwar plant, which started operations in April this year," said Ravi Sud, senior vice-president and chief financial officer, Hero Honda.

He added the firm would rebalance production output from the other two plants. "Production will rise to more than 2,000 units a day in Haridwar from 1,100 units now," Sud said.

Tata Motors, India's largest auto company by revenues, plans to shift the entire production of the Ace mini truck to its Pant Nagar plant in Uttarakhand from its current base in Pune. The shift will free up over five acres in Pune that will be used to ramp up production of the Sumo, Safari and Indica models.

Tata Motors' Pant Nagar facility has an annual capacity of 250,000 units of the Ace compared to 60,000 units in Pune.

The facilities in Uttarakhand, which were created to reduce manufacturing costs and pass on the benefit to customers, are now cushioning the same companies against the unprecedented increase in input costs, notably steel.

"Companies are now looking to contain their eroding margins as against passing on the benefit of the excise duty waiver from the Uttarakhand plants," said a Mumbai-based analyst.

"We need to protect our margins," Ravi Kant, managing director, Tata Motors, said last month after announcing a 30 per cent dip in first-quarter net profits. He was clarifying whether the excise benefit will be passed on to the customer.

Mahindra and Mahindra, the Mumbai-based tractor and utility vehicle maker, had also set up a Rs 70-crore three-wheeler plant in Haridwar in 2005. The company is now increasing capacity from the facility to about 100,000 units from 35,000 units currently following strong demand.

Ashok Leyland [Get Quote] is also setting up an integrated plant for commercial vehicles at a cost of more than Rs 2,000 crore, slated to start production by 2010.

"Excise duty and other fiscal benefits have driven many of the auto makers to shift production to Uttarakhand. The 14 per cent excise duty waiver alone will translate into an effective 10 per cent saving for the company," said K Sridharan, CFO, Ashok Leyland.

"This saving will add substantially to the company's bottom-line otherwise companies can also partially pass on the benefit to the customer," he added.