The phase-out of incentives will fulfil DTC agenda

The finance minister's proposal to reduce the corporate tax burden is a welcome measure and in line with the international norm of lower, competitive tax rates to attract investments. The corresponding phase-out of exemptions and deductions is a step in the right direction. Incentives tend to create distortions between investments backed by incentives and those without incentives and encourage rent-seeking behaviour. They increase complexity of tax laws that result in unnecessary disputes and administrative costs.

However, the withdrawal of incentives is a sensitive proposal, as it entails both gainers and losers.

The proposal under the Direct Taxes Code (DTC) to withdraw incentives had become controversial due to the transitional issues involved.

But this time, the government is trying to use a softer mechanism to enable a smoother transition to incentives-free tax system.

All current sunset dates will be honoured and where the law does not provide any sunset dates, the government proposes a sunset date of March 31, 2017, for commencement of activity, such as in the case of development of Special Economic Zones and infrastructure facility.

The DTC proposals had two key underlying objectives, that is, simplification of law to remove ambiguity and phase-out of incentives for lowering the tax rates.

It appears that the R V Easwar committee constituted by the government will examine the aspect of simplification of laws. The phase-out of incentives will complete the DTC agenda. The thoughtful manner of phasing out incentives will address many earlier concerns of the taxpayers.

Satya Poddar, senior Advisor, EY India
Views are personal.