CBDT roadmap for phasing out tax exemptions - Will Kelkar Committee have the last laugh?

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In line with Finance Minister’s statement in his 2015 Budget Speech to reduce the corporate tax rate from 30% to 25% (over 4 years) and simultaneously gradually withdraw tax exemptions, CBDT has proposed that profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers and that sunset dates provided in the Act will not be extended. Further, CBDT has also proposed that there will be no weighted deduction benefit with effect from April 1, 2017.
Is the CBDT proposal fair & balanced enough? Has the time finally come to do away with exemptions, that according to the famous Kelkar Committee report (2004), create "unjustifed distortions"? Does the duet of tax rate reduction & phasing out of exemptions meet the Kelkar committee triple test of " equity, efficiency & effectiveness"? Is there some merit when a well known CEO of a big pharma company, Kiran Mazumdar Shaw, says that doing away with weighted deductions will "kill" innovation and deliver a big blow to the ambitious 'Make in India' campaign?


Dinesh Kanabar
CEO, Dhruva Advisors LLP

"There is a near unanimity among economists that tax policy reform in India would be incomplete without a withdrawal of incentives. It has also long been felt in policy circles that many incentives have a distortionary effect on resource allocation and that they unduly affect revenue collections. From a pure economic standpoint therefore, a decision to phase out incentives cannot be seriously faulted.

However, at a practical level, such a withdrawal could have a significant impact on specific sectors, regions and indeed individual taxpayers. Hence, it is necessary that any such exercise be undertaken in a considered and deliberate manner, having regards to potential ground-level implications in addition to the macro-economic factors.

The Government’s proposals reflect an even-handed attempt to balance these potentially conflicting considerations. For instance, its decision to phase out incentives under sections 10AA, 80-IA, 80-IAB and 80-IB by fixing a 2017 sunset date for commencement of activity, rather than fixing a short -term terminal date for the availability of incentives is clearly meant to address taxpayer concerns. As regards other incentives (such as weighted deduction for scientific research, accelerated depreciation etc.), perhaps a slightly longer sunset clause may have been warranted. Since the last instalment of the corporate tax rate cut will take effect only in FY 2020-21, a sunset date of at least FY 2020-21 for key incentives would have been appropriate. This would have helped boost business confidence and investor sentiment at a time when the Government is making an aggressive push to spur economic growth."