The Hindu Business Line : Don't build on tax-breaks

ONE CANNOT REALLY blame the expert group that has come up with the Draft National Housing Policy 2005 for recommending a concessional rate of taxation of rental incomes as a measure to boost the stock of residential units in the country. It has become customary for those in the government and the business community to look to the taxation structure for promoting growth in any sector. Thus, if the software industry is to be pushed into growing at a higher rate, the experts look first at some tax exemptions for profits generated by the units. Similarly, if exports are to be pushed, the immediate solution is to give export profits a tax break.

Once incorporated into the tax structure such incentives are hard to eliminate. Vested interest inevitably develops around their continuation. For instance, there may be little justification for continuing with the partial exemption from taxation of export incomes when the foreign exchange reserves are soaring. But any tinkering with the incentive structure for export incomes is sure to draw vociferous protests. That apart, the problem with tax incentives for specific economic activities — be it house ownership or software development — is that they tend to destroy the core spirit of income taxation as something that is `source' neutral. It is inherently iniquitous for the state to discriminate against, say, a salaried person, by subjecting him with a higher impost while taxing less someone who earns the same quantum of income renting out residential units. In the instant case, it also runs counter to the policy of promoting housing for self-occupation as opposed to building residential units as an investment. The Government may be pardoned for putting in place an iniquitous tax regime if it really subserves a larger policy goal. As it happens, the tax break for income earned from letting out residential units fails this test as well. The Planning Commission has noted in the Tenth Plan document that the real shortage is in the provision of housing for the poorer and economically weaker sections of the urban population. There is no reason to believe that the tax break would spur the creation and the eventual letting out of the kind of housing stock that would be needed by this section.

This is not to say that there is no case for incentives of any kind in the country's tax code. In exceptional circumstances, such as the nature of the international tax environment, which occasionally distorts the domestic value creation, a case can be made out for the state incorporating incentives in the tax code. Even then, if superior policy options can be pursued, they should be preferred over conventional income-tax exemptions. As it happens, the Government actually has better policy options in the context of promoting housing stock. For instance, persuading States, through fiscal incentives, to liberalise their rent control laws or dismantle the oppressive regulatory structure on usage of urban land or rationalising the stamp duty structure are more likely to secure this outcome than a tax exemption for rental incomes.

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