Thirteen years, nearly to the day. Quite a time lag in the journey for the initial ideation by the far-reaching recommendations of the Task Force on Direct Taxes chaired by Vijay Kelkar to reach the current milestone, wherein the finance ministry has presented the draft roadmap for withdrawing the tax exemptions that clutter the tax code.
It was in December 2002 that the task force stated “our analysis of the existing tax framework shows that thanks to myriad, often contradictory tax exemptions, the system has become increasingly complex. In tax policy and tax administration, such complexity is inherently regressive … tax exemptions are opaque since their incidence and implicit cost is non-transparent.” The report recommended that state support should be directly provided where required and audited. The tax code be removed of the dichotomy from being simultaneously a law to tax and also to promote investment.
The announcement of the draft roadmap was quite anticipated as the finance minister had alerted all the stakeholders that a roadmap was in the making. This was a key announcement at the time of presenting the Union Budget to Parliament in February 2015, wherein he committing to reducing the corporate tax rates from 30% to 25%. The finance minister simultaneously recognised that the effective tax rate is around 21-23%, given the build up of tax exemptions. So, he sought to achieve a balance by reducing tax rates with removal of tax exemptions.
The roadmap provides a judicious three-pronged approach. Firstly, that all existing tax holiday sunset milestones will be respected—no roll-back and no extension proposed. This is sensible and aligns with the government’s stated intent on keeping tax laws predictable and stable.
Secondly, all other tax holiday provisions to have a uniform grandfathering of March 31, 2017, where no defined sunset date exists today. Effectively, the draft roadmap indicates that eligible businesses and activities need to commence operations or entitlement by this drop dead date to avail of the tax exemption for its specified period. The industry would have hoped for a lengthened and staggered phase out of the drop dead date—especially for capital-intensive and long-gestation projects like power and upstream oil and gas. The upside could well be that the financial period from now till the drop dead date could witness much-needed and heightened economic build up as projects race to meet the deadline for commencing their tax holidays.
The third aspect of roll-back from April 2017 of the weighted deduction is surprising and of concern as it impacts much-needed incentives for R&D. Industry will certainly lobby hard for a longer lead time for these incentives. Industry will be justified and policy-makers should heed to this request as several developed nations have introduced patent or innovation box schemes to attract investors to their jurisdiction for research activities and registrations of intangibles.
Finally, the taxpayers were left searching for simultaneous announcing of the schedule of the corporate rate cut. This is currently eluded. Possibly, the finance minister would announce it post taking a grip on the impact of the withdrawal schedule. Industry will also seek that these measures involving withdrawal of exemptions in the prevailing weak global economy will be balanced by an efficient GST roll-out and more progressive measures for the ease in doing business in India.
The author is leader, Direct Tax, BMR & Associates LLP