The Hindu Business Line : Open-ended tax exemptions to go — All waivers to have specified sunset clause

THE Finance Ministry has decided to put an end to the regime of `open-ended' tax exemptions. The Ministry has already initiated, as a part of the 2004-05 Budget exercise, a process of putting all direct and indirect tax exemptions under the scanner and subjecting every exemption to a specified sunset clause or to a periodic review.

"As far as exemptions or tax holidays are concerned, we would begin on a clean slate, assuming that there is no prima facie reason for any of these to exist in the first place. Once this basic principle is laid down, we will examine every exemption on a case-to-case basis and decide whether or not there is merit in having it on the slate," sources in the Finance Ministry told Business Line.

Further, even if an exemption would figure on the slate, there will have to be an explicit definite sunset clause, after which it would cease to exist. Alternatively, every exemption would be liable to review at the end of, say three years. Simply put, every exemption would first be put to the "utility test" (i.e. whether it is required at all) and even if it passes this test, there will be a mechanism for a periodic review. "No exemption will be open-ended," the sources emphasised.

What this essentially means is that there is no case for having tax exemptions of a perennial nature, such as the one on dividend income or capital gains earned from investments in infrastructure companies under Section 10 (23G) of the Income-Tax Act, 1961.

On the other hand, existing exemptions enjoyed by units in software technology parks or newly established 100 per cent export-oriented units under Sections 10 A and 10 B may be persisted with, as they incorporate a definite sunset clause till 2009-10 for their expiry.

At the same time, the sources said that there is no possibility of reintroducing past exemptions such as that on profits earned from exports under Section 80 HHC. This facility was phased out over a five-year period, with the last 20 per cent income exemption component lapsing on March 31, 2004. While the Federation of Indian Export Organisations (FIEO) has pitched for restoration of Section 80 HHC benefits, the Finance Ministry sources, however, made it clear that "there is no question of bringing back an exemption that has been phased out."

A similar policy of phasing out indirect tax exemptions would be applied in respect to existing open-ended and blanket sops specific to locations (North-East, Jammu & Kashmir, Kutch, etc), sectors (small-scale units) or products. "As a general rule, every exemption will have a specified sunset clause so that there is no case for their permanent existence," the sources added.

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