The UK is to offer the Indian film industry tax breaks and grants in an effort to entice more Bollywood projects to British locations.

The Highlands of Scotland have already been used as the conflict-ridden vale of Kashmir in scores of Indian productions, in which musical numbers set in the mountains and featuring star-crossed lovers are standard fare. In recent years, however, Indian producers have increasingly fallen for the charms of lower-cost locations in Eastern Europe.

In a renewed effort to woo India's film-makers, British trade representatives had talks this week to pave the way for a new UK-India film co-production agreement.

The treaty will enable UK and Indian film-makers to work together to co-produce films that will be eligible for national status in both countries. In the UK, that means that joint-production films will qualify for the same tax breaks and grants as their purely British peers. Films with a budget of less than £20 million will get 20 per cent tax relief, falling to 16 per cent for bigger projects. Producers will also get access to two funds run by the UK Film Council, worth £13 million.

Officials expect ten Anglo-Indian films to be produced under the treaty in its first two years as Bollywood increasingly broadens its horizons beyond Bombay.

Siddharth Roy Kapur, the chief executive of UTV Motion Pictures, the London-listed group that is one of Bollywood's biggest production houses, said his company would be exploring the opportunities to carry out more work in the UK on the back of the treaty. He said: “We will be looking at the economic case for doing more in the UK.”

Indian production houses are becoming increasingly active in overseas markets. UTV, which is partly owned by Disney, the US media giant, also announced this week that it has launched its first solo production in Hollywood, a small $2 million budget black comedy called Ex-terminators that will star Heather Graham.

The latest film treaty with India is the seventh such deal that the UK has cut. More than 400 co-production films have been made under similar treaties over the past seven years, including more than 140 minority UK co-productions.

On average, about a third of a co-production's budget has been spent in the UK, contributing more than £1 billion to the economy.

The UK already represents a key market for Bollywood, an industry that sells more than 3 billion cinema tickets in India every year - but at rock-bottom prices that deliver slender returns. In the UK, more than 2.5 million people went to see a Hindi-language film in 2005 and Indian films accounted for about 16 per cent of all UK releases.

Creon Butler, the British Deputy High Commissioner in Delhi, said: “The UK is the world's number one market for Bollywood productions outside India.

“With the UK-India film co-production agreement, the opportunities for Indo-British partnerships in the film industry are sure to increase.”

John Woodward, the chief executive of the UK Film Council, said: “Aside from the clear economic benefits to film-makers, the treaty also aims to increase the diversity of film making, giving film-makers the opportunity to tell new stories that reflect our shared history and culture.”

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