The Hindu Business Line : Taxing questions

THE HUGE TAX demand slapped on Wipro last week is unlikely to be the last of such cases. Simply because the tax incentive regime for fresh investments simply bristles with contradictions. The `tax-holiday' privilege is available for lump investments but not for marginal or incremental investments. This is clear from the fact that the law speaks of only `undertakings' being eligible for such a concession. It is not clear why lump investments alone be singled out for such special treatment. If concessions are meant to promote additional investment and thereby add to employment, then incentives ought really to be in proportion to the quantum of investments rather than their discrete doses.

The problem with this approach is that it is hard to define an `undertaking' with a degree of precision that would enable objective tax administration. If the new investments occur in a wholly new location then, of course, the concept does not pose any difficulty though it can be argued that decisions on where fresh investments are to be located ought not to be dictated by the idiosyncrasies of the tax regime but by the cost-benefit calculations of the promoter. It would be ironic that substantial additional investment by Wipro — far more perhaps than the combined investments by some other software units — should be denied a favourable tax treatment merely because it happens to have come up in the same complex. There is also a contradiction in choosing to favour investments made by units located in these technology parks and not by those outside it. Clearly, these concessions appear to have been drafted into the tax code more to enable technology park promoters — more often than not public sector undertakings themselves — to attract entrepreneurs to locate their units in them rather than improve the economic viability of those firms themselves. Clearly in combining the incentives for promoters of software technology parks and units in such centres in one composite tax incentive has produced an absurd outcome.

None of these complications would have arisen had the country chosen the path of moderate taxation sans a complex web of incentives and concessions that has over the years, crept into the tax code, something that the Kelkar Committee had argued for. But, unfortunately, vested interests have acquired such a stranglehold on the present system of tax administration that any sensible reform seems well nigh impossible. Politicians too seem to favour the present arrangement where all kinds of social programmes are sought to be incentivised through tax concessions. This is hardly surprising as tax incentives are an easier substitute for hard action. Thus, for instance, one could claim to have done something for rural water supply merely by incorporating an incentive to the private sector for undertaking such programmes than any concrete public outlays that actually enhance access to clean water for the rural masses. A complex tax structure is the price that society pays in this marriage of convenience between the political class and the business of tax administration.

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