TIOL-DDT 535 · the untouched capture
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<p align="justify"><b><font color="#663399" size="3" face="Verdana, Arial, Helvetica, sans-serif">TIOL-DDT
535</font></b><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b><br>
18.01.2007<br>
Thursday</b></font></p>
<p align=center><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>On exemptions
and tax incentives</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
National Institute of Public Finance and Policy released a working paper some
time back on, <b><i>Raising the Tax-Ratio by Reiningin the “Tax-Breaks” An Agenda
for Action</i></b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Are all the tax concessions
and exemptions logical and do they make good economic sense? Some interesting
observations of the paper.</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>SEZ – infrastructure
and not fiscal concession is the incentive</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">There is no good evidence
to support the case for tax incentives for SEZ units apart from remission of
customs and domestic trade taxes which should apply to all exports irrespective
of whether they are located in an SEZ or outside. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">For improving the attraction
of SEZs what is needed most is a world class infrastructure. Fiscal incentives
rank low in the attractions of SEZs; they may be used as a convenient channel
for routing profits earned elsewhere through SEZs to escape taxation. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The revenue cost of tax
incentives for SEZ investors is difficult to estimate in the absence of requisite
data. Informal discussions with officials in the Income-tax Department suggest
that the loss may be nearly Rs. 10,000 <i>crore</i>from the income tax holiday
alone. The revenue forgone on account of excise and customs, though sizeable,
should not be counted as loss since these remissions <i>are </i>available for
exports from anywhere in the country. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>The extension of tax
holidays to SEZ units has been unwarranted, especially after section 80HHC benefits
have been done away with. A case can at best be made for providing some inducement
for infrastructure development as it tends to be front loaded in terms of investments
and costs. The tax holiday for others is unjustified and should be terminated
forthwith.</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Regional exemptions –
no good?</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Region-specific tax holidays
are objectionable also on economic efficiency ground, as they create a tendency
to shift businesses to areas that do not have a comparative advantage for the
activity in question</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Given the present environment
where e-commerce is taking roots, there is a possibility of bill transactions
being undertaken from areas where the incidence of tax is lower. This, however,
does not imply that the goods need to be delivered out of the place where the
billing is actually done. While the administrative departments of the indirect
taxes would like to check for the level of activity in the enterprise, this
lies outside the domain of the Income-tax Department because of tax holiday.
It is thus possible that in some cases it is only the billing activity which
moves to the specified jurisdiction, not the entire manufacturing activity,
especially if the incentive available relates only to income tax. This would
mean an erosion of the tax base in the rest of the country and not so much the
generation of new incomes or expansion of the base. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The tax holidays extended
to Himachal Pradesh and Uttranchal are particularly objectionable because they
virtually negate whatever incentive the holidays for investment in the N-E states
had been providing. A study has revealed that </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
No large-scale investment has taken place as a result of the policy: </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
Small and medium enterprises dominate the scenario, with low investment, low
value added, and low employment. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
Several excise intensive units reflect only the final stage of manufacturing
activity, entailing relatively low investment and employment, and figure among
the major excise beneficiaries. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
Developed states within the region continue to attract most of the investment:
Assam and Meghalaya account for 91 percent of the investment. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
Better connectivity with the mainland, quality of infrastructure and logistics,
security concerns are identified as the driving force for the observed pattern
of location of investment. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++
With the tax holidays extended to Uttaranchal and Himachal Pradesh, most of
the investments will flow to them, as they are strategically better placed
to attract investors, with closer connectivity to the major markets and therefore
having a competitive edge in attracting investment. </font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The study comes out with
the recommendation that, what would be more helpful for the N-E states is, creation
of better infrastructure. Manipur does not have a kilometer of railway line
even after over fifty five years of independence </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>agricultural income</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Exclusion of agricultural
income from the income tax base is a legacy of history dating back from pre-independence
days (and not just a creation of the constitution) and does not stand to reason
now. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">When income tax was first
introduced in <st1:country-region><st1:place>India</st1:place></st1:country-region>
in 1860, agricultural income was taxed on the same footing as other incomes.
However, after a transitional period from 1860 to 1886, the law that laid the
basis of income taxation in India on a permanent footing <i>viz., </i>the <i>Act
of </i>1886, excluded agricultural income from the tax base on the ground that
by that time a cess had been imposed on land revenue which was already quite
burdensome and so subjecting agricultural incomes to income tax would amount
to double taxation. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The constitutional scheme
of assignment while assigning the power to tax agricultural income to the states,
stipulated that 'agricultural income' will have the same meaning as given in
the <i>Income-tax Act. </i></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">However, whereas in the
1800s and even till the time of independence, land revenue comprised a substantial
proportion of government's revenues, at present land revenue (including surcharges
and cesses based on land revenue) and <i>agricultural income tax </i>(introduced
in a number of states since 1938) account for a relatively small proportion,
approximating barely 0.7 percent, of the total tax revenue of states. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Thus, the argument about
double taxation, which provided the original rationale for exclusion of agricultural
income from central income tax is no longer valid. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Small Scale Industries
</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Small scale industries account
for approximately 35 percent of total exports and 40 percent of value added
from industry, but contribute very little to the exchequer, as they enjoy generous
treatment in taxation. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The rationale for protection
to the small scale sector, first articulated in the Industrial Policy Statement
of 1948, was promotion of employment, wide dispersal of industrial growth, and
also the Gandhian ideology of self-supporting village economy</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The benefit of exemption
should apply only to really small units, who, by our criteria, do not ordinarily
have clearances of more than Rs. 50 lakhs in the previous/current year, inclusive
of all items which are currently excluded while computing the clearance. All
other units should be fully taxed with the benefit of credit for tax paid on
inputs. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">No large-scale investment
has taken place as a result of the policy: </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Small and medium enterprises
dominate the scenario, with low investment, low value added, and low employment.
</font></p>
<p align=center><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Service
Tax in Jammu and Kashmir</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">While the Indian Service
Tax is not applicable in Jammu and Kashmir (it is applicable though in Japan
as many Revenue officers believe), the State of J&K has its own Service
Tax. More services like courier services, marriage and banquet halls, private
educational and professional institutions, coaching institutions, cable network,
insurance, banking and other financial services are being brought under the
Service Tax net. The rate of Service Tax also is being hiked from the present
4% to 8%. </font></p>
<p align=center><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Tax preparer’s
Scheme – 5000 qualify</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The assumption that now-a-days,
nobody is interested in a government job, as there are too many jobs ready and
waiting in the IT sector, is apparently wrong. The Tax Return Preparer’s Scheme
of the Income Tax department received around 90,000 applications. Some 48,000
candidates were short listed to appear for the test, out of which now 5000 candidates
have qualified.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The successful candidates
will undergo short training at 100 centres throughout the country, and appear
for a certification test before being licensed to prepare and file tax returns.
The Scheme is being implemented in partnership with NIIT. </font></p>
<p align=center><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>Lending
to Priority Sector – RBI issues draft Guidelines</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Reserve Bank of India
has issued draft guidelines for feedback from public. They need the response
before February 28,2007.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>The priority sectors
are </b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(i) Agriculture (Direct
and Indirect finance): </b>Direct finance to agriculture shall include short,
medium and long term loans given for agriculture and allied activities directly
to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs)
of individual farmers without limit and to others (such as corporates, partnership
firms and institutions) up to Rs. 20 lakh, for taking up agriculture/allied
activities. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Indirect finance to agriculture
shall include loans given for agriculture and allied activities as specified
in Section I, appended. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(ii) Small Enterprises
(Direct and Indirect Finance): </b>Direct finance to small enterprises shall
include all loans given to small (manufacturing) enterprises engaged in manufacture/
production, processing or preservation of goods, and small (service) enterprises
engaged in providing or rendering of services, and whose investment in plant
and machinery and equipment (original cost excluding land and building and such
items as mentioned therein) respectively, does not exceed the amounts specified
in Section I, appended. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Indirect finance to small
enterprises shall include finance to any person providing inputs to or marketing
the output of artisans, village and cottage industries, handlooms and to cooperatives
of producers in this sector. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(iii) Other Small Business
/ Service Enterprises: </b>Other Small Business / Service Enterprises shall
include small business, retail trade, professional & self-employed persons,
small road & water transport operators and all other service enterprises,
as per the definition given in Section I appended. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(iv) Micro Credit: </b>Provision
of credit and other financial services and products of very small amounts not
exceeding Rs. 50,000 per borrower to the poor, either directly or indirectly
through a SHG/JLG mechanism or any intermediary (including NBFC/NGO/MFI), or
to an NBFC/NGO engaged in provision of credit to the poor up to Rs. 50,000 per
borrower will constitute micro credit. The poor for this purpose, shall include
persons below the poverty line in the respective areas. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(v) Education loans:
</b>Education loans include loans and advances granted to only individuals for
educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh
for studies abroad, and do not include those granted to institutions; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>(vi) Housing loans: </b>Loans
up to Rs. 15 lakh per family, for construction of houses by individuals, (excluding
loans granted by banks to their own employees) and loans given for repairs to
the damaged houses of individuals up to Rs. 1 lakh in rural and semi-urban areas
and up to Rs. 2 lakh in urban areas. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(2) Investments by banks
in securitised assets, representing loans to agriculture (direct or indirect),
small enterprises (direct or indirect) and housing, shall be eligible for classification
under respective categories of priority sector (direct or indirect) depending
on the underlying assets, provided the securitised assets are originated by
banks and financial institutions and fulfil the Reserve Bank of India guidelines
on securitisation. This would mean that the banks' investments in the above
categories of securitised assets shall be eligible for classification under
the respective categories of priority sector only if the securitised advances
were eligible to be classified as priority sector advances before their securitisation.
</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(3) Outright purchases of
any loan asset eligible to be categorised under priority sector, shall be eligible
for classification under the respective categories of priority sector (direct
or indirect). </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(4) The targets and sub-targets
under priority sector lending would be linked to Adjusted Net Bank Credit (ANBC)
(Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM
category) or Credit Equivalent amount of Off-Balance Sheet Exposures (as defined
by Department of Banking Operations and Development of Reserve Bank of India
from time to time), whichever is higher, as on March 31 of the previous year.
Investments made by banks in the Recapitalization Bonds floated by Government
of India will not be taken into account for the purpose. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">(5) In order to encourage
banks to increasingly lend directly to the priority sector borrowers, the banks'
deposits placed with NABARD/SIDBIon account of non-achievement of priority sector
lending targets would not be eligible for classification as indirect finance
to agriculture/SSI, as the case may be. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><a href="New">RBI
Press Release : 2006-2007/963</a></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until
tomorrow with more DDT </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have
a nice day. </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail
your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
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href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com</a></font></p>
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