Govt plans to phase out long-term tax holidays to plug revenue loss

The domestic industry may not get ‘paid holidays’ as the Finance Ministry wants to ease out the long-term tax exemptions given across sectors.

According to Finance Ministry, the government has been under fiscal strain on two accounts: high corporate tax rate and revenue loss due to excessive exemptions. Therefore, starting next fiscal the Finance Ministry wants to phase out such benefits by introducing sunset clauses in all the existing exemptions.

At the recent meeting with the stakeholders, Revenue Secretary Hasmukh Aadhia had clearly indicated that the no more extensions will be given and asked the industry to come with a list of such exemptions, official sources told BusinessLine .

The industry enjoys incentives under Sections 80I (A) and 80 I (B) of the Income Tax Act among others. The section provides for tax deductions on profits to a number of infrastructure sectors and other industries such as SEZs, undertakings in generation and distribution of power, as well as those involved in cold chain facility.

For instance, the oil industry explorers who enjoy a seven-year tax holiday for mineral oil were told that no further benefit will be given after the expiry of the period.

This has to be done to gradually bring down the corporate tax rates to 25 per cent as proposed by Finance Minister Arun Jaitley, Finance Ministry officials said. In his Budget speech of 2014-15, Jaitley said “a regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion.”

The Budget documents reveal that the exchequer lost out on an estimated ₹62,398.6 crore of corporate tax revenue in fiscal 2014-15 due to the various tax incentives given to companies.

According to the Budget documents for 2015-16, an analysis of the returns of 5.6 lakh companies revealed that the effective tax rate was 23.22 per cent in 2013-14 as against the rate of 22.44 per cent reported in 2012- 13 though the average statutory tax rate is 33.217 per cent.

Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP, said that tax holidays and related incentives were a popular feature of the fiscal policy for driving growth and served their objective as witnessed by the success of the software and IT industry.

But, subsequently the revenue impact was softened by introducing the minimum alternate tax which enabled partial revenue collection whilst tax holidays ran their natural course across several sectors.

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