A welcome shift to investment-linked tax breaks

It is welcome the Direct Taxes Code (DTC) Bill has rationalised tax incentives for infrastructure projects, so as to boost efficiency and transparency. What is envisaged is change-over to investment-linked tax benefits, and the phasing out of blanket tax holidays including for profits. In the Income-Tax Act, the tax exemptions on offer for infrastructure investments have largely been profit-linked. And such incentives are inherently tax inefficient and liable to misuse. Which is why the norm globally is to provide one-time investment-linked tax benefits for lumpy, capital-intensive infrastructure projects rather than make the deductions open-ended and profit-linked. Under investment-linked method, all capital expenditure, other than expenditure on land, goodwill and financial instruments would be fully allowable as tax deduction. But that would render profits liable for taxation, and so would reduce the scope for window dressing and 'creative accounting'. There is relatively less scope to inflate investment numbers. Last year, the Union Budget did begin the change-over by extending investment-linked tax incentives for the setting up of cold chains, warehousing facilities for agri-produce and the laying and operation of cross-country natural gas or petroleum pipelines.

The DTC Bill has now proposed to extended the investment-linked tax incentive criteria for the 'business of developing, or operating and maintaining any (emphasis added) infrastructure facility'. Specific infrastructure sectors have also been mentioned in the Thirteenth Schedule, including power projects, hotels, hospitals and housing projects for slum redevelopment. We need to standardise the tax benefits and build in predictability, given the huge investment backlog. Meanwhile, it is notable that 50% of infrastructure capacity now in the pipeline is via private sector participation, indicating huge non-governmental capital expenditure going forward, and huge potential for revving up fund flows. Revenue leakage remains horrendous, particularly in the distribution phase of the state power sector. We need proactive policy and the levy of reasonable user charges to incentivise infrastructure, rather than questionable tax props.