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Straight from the Specialists

Time for a shift in the tax incentive regime?

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(Any opinions expressed here are those of the authors and not of Reuters)

The Indian economy is currently on the path of reform with the government liberalising FDI policy and relaxing overseas debt funding. And with the union budget just around the corner, investors are hoping for incentives on the tax front as well.

Traditionally, the government provides profit-linked tax incentives to promote investment in specified industries/states. However, considering the increasing need for investment in developing economies like India, the government is considering a shift from profit-linked tax incentive schemes to investment-linked tax incentive schemes. The desire for such a shift was clear under the proposed Direct Tax Code Bill.

The government has already started taking steps in this direction by introducing tax deduction for investment (capital as well as revenue expenditure) in certain specified business segments like setting up and operation of cold chain facilities, natural gas and petroleum distribution channels, building hospitals, luxury hotels, etc.

Such a paradigm shift to investment-linked incentives is likely to raise the concern of investors as it would cap their tax incentives to the amount of investment made and not on the profit generated from the venture (which is the current scenario).

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