Sectoral, area-based tax breaks may go

DELHI: Budget 2006-07 could see the end of a number of sectoral and area-based exemptions that have been used by India Inc as significant tax shelters. Advisor to finance minister, Parthasarthi Shome, today said ���there are a plethora of exemptions based on area, sector and goal specificity���.

He also suggested that the government could take a re-look at the 150% tax deductions given to sectors like R&D in the pharma industry. Shome made these comments during his interaction with tax experts at a conference organised by the International Fiscal Association with Ficci.

The finance ministry is currently finalising tax proposals for the Budget. The ministry has often tried to whittle down the number of such exemptions, which dot direct and indirect tax laws.

Shome also indicated that the ministry would not alter the depreciation rules changed in the last budget as they have encouraged investment. ���The changes have incentivised investments, and people are creating more capacity in the economy,��� he said.

In Budget 2005-06, the ministry had reduced the depreciation rates from 25% to 15% for tax set-offs, and built in an additional depreciation benefit for the first year of investment.

Shome noted that there was a need to rationalise weighted tax deductions that went over 100%. ���Weighted incentives are given in many cases for these exemptions, and needs rationalisation,��� he added. The pharmaceutical sector currently enjoys a 150 % tax set-off for R&D, and has sought a hike in it to 200 % in the forthcoming budget.

Shome reiterated that the bank cash transaction tax announced last budget had revealed significant trails of black money. He also said the department had issued a long clarification on FBT sorting out most issues. A national level VAT could come about in another three years, he said.

The advisor pointed out that for the first time, direct tax collections have reached 5% of GDP, which was a welcome trend. He said as a developing country, the revenue collections were moving from their emphasis on indirect taxes to direct taxes. In order to be certain about the tax incidence, direct taxes were a surer way to improve revenue collections, he added.

He also said with the withholding tax rates having come down to 10%, many bilateral tax treaties with preferential rates of 15-20% ���had become passive���. This is an indication that our tax regime has become competitive, he pointed out.