Those who love to tax shouldn?t love tax sops. But the government loves both. And it goes back on its promises as a result. Budget 2008-09 introduced a sunset clause for the ten-year tax holiday for all refineries. But the petroleum minister convinced North Block to restore tax sops for exploration and refining of crude oil. The Budget?s proposal had meant that no refinery beginning commercial production after April 1, 2009 would have qualified for sops. Petroleum minister Murli Deora argued this would discourage the refining business. That argument can be made ad infinitum and is, therefore, dodgy. It is an accepted axiom of any such provision that it must carry a sunset clause. A broad consensus has emerged in this country on the need to eliminate tax subsidies as a means to promote public goals. Instead, such subsidies must be accounted for in the expenditure budget, and, therefore, be accounted for upfront. Otherwise, the incentive for any sector to negotiate a suitable tax regime (with its attendant corruption coefficient) will continue. The finance ministry?s published figures show the revenue foregone on this head at Rs 6,835 crore in 2007-08, a 30% rise in just one year. That?s a very powerful argument to reduce tax sops.
The oil ministry became agitated because domestic and foreign investors are sinking wells under the seventh round of the new exploration & licensing policy. Many companies claim their investment decisions will go askew if they have to pay tax. The oil ministry supplemented this by saying the Budget?s sunset clause was a reversal of an international commitment made by the government. But if a foreign company gets a tax set-off in India for a well that begins commercial production, it will still have to pay tax on that venture in its home country. There are no tax regimes or agreements that offer equivalent bilateral waivers. So, when foreign companies talk of tax planning, or the oil ministry blithely talks of international commitments made by India, they are parsing the issue a bit. The current regime means India doesn?t get the tax that foreign companies are paying in their own country. That?s not a particularly progressive fiscal stand. Businesses love tax sops and they will always say this or that sector getting a break means society benefits. Ministers who are in charge need to see through and beyond these clever arguments.