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Tax incentives may be linked to performance

Subhomoy Bhattacharjee & P Vaidyanathan Iyer in New Delhi

Advisor to the finance minister Vijay Kelkar's task force on direct taxes is likely to recommend a system in which companies would become eligible for tax incentives only on fulfilment of pre-determined performance parameters.

According to finance ministry sources, a tax regime that encourages efficiency of invesment already made and improves asset utilisation would be more effective.

The task force is slated to make a presentation to the finance and company affairs minister on November 1. The report is expected to be posted on the ministrys website the next day.

The sources said the incentives to set up factories and units in backward areas did not have the desired effect of spreading out industries.

Further, with a huge surplus capacity in most of the sectors, companies could not take advantage of the incentive-based taxes like investment allowance and additional depreciation set off for new plant and machinery.

The sources also said, the task forces is likely to recommend a sunset clause for phasing out exemptions.

It is of the view that exemptions should be rationalised and eventually eliminated. All the exemptions might be brought under one section, they said.

Instead of granting tax exemptions to organisations, it would be a better idea to extend tax credits.

Government sources said that the huge revenue foregone on account of exemptions has been well illustrated in the report of the Parthasarthi Shome advisory group report on tax policy and tax administration for the Tenth Plan.

The sources said that the task force will take a stern look at all exemptions, particularly those for charitable institutions. The incentive system could be targetted at zero-tax companies.

While these companies pay a minimum alternate tax equal to 7.5 per cent of their book profits, the receipts realised are not commensurate with the tax incentives they claim.

Sources said the Shome committee had estimated the revenue foregone due to the various exemptions for non-profit organisations at Rs 5,750 crore (Rs 57.5 billion) in 2000-01.

It had recommended tax exemptions only to donative NPOs and further said that all provisions should be brought under one section.

The Kelkar task force will also look at both income tax and corporate tax rates, finance ministry sources said.

As far as tax incentives on small savings instruments are concerned, they said, it has been felt that there was merit in continuing with many of them. This will help in increasing the savings rate, the sources said.

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