The Direct Tax Code will dis-incentivize Infrastructure Sector

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The Direct Tax Code will dis-incentivize Infrastructure Sector

By Rahul Garg and Richa Sawhney PWC

The proposals in Direct Tax Code (DTC) are historic in more than one ways. It has deviated from historical position of using the tax legislation to serve the development objective. Secondly, it proposes to levy tax based on the value of assets employed in the business irrespective of the actual profits / or income generated.

In so far as using the tax legislation for serving the development policy needs is concerned, it is debatable whether the tax collected from elimination of profit based incentives would be efficiently applied to serve the desired developmental policy initiatives. Whereas, it looks an attractive proposition that the tax legislation should serve only the prime purpose of collecting the revenue, it needs to be borne in mind that if the tax legislation providing the incentives compares better than the other forms of delivery of targeted subsidies, it may well be the best way to efficiently deliver the subsidy at source. Historically it has been seen that direct disbursement of subsidy has been froth with leakages, delays and numerous other controversies. It is also questionable whether direct disbursement of subsidy will be compliant will the WTO’s commitments. Hence, we should move to a regime of considering the tax legislation in a purist manner once we are able to evolve, test and experience better mechanism to deliver the subsidy, than to deliver it at source.

The second significant departure is in respect of criteria for levy of income tax which is not based on income. The proposed levy of minimum alternate tax (MAT) at two per cent on gross assets is more like a penalty for utilizing the capital in a business that generates less than two per cent revenue for the government. There seems to be an underlying assumption that all gross assets employed by the companies must produce atleast eight per cent profits (to give two per cent tax revenue at the rate of twenty five per cent) and they must produce eight per cent profits from year one and year after year. This proposal will penalize investment in infrastructure and other capital incentive sectors.

It is difficult to create an economic environment where all assets employed by the companies, irrespective of the activities, where these assets are employed year after year generate the target profits. We all know the gestation periods and the returns on long term infrastructure projects would never be able to achieve this target and would be penalized to pay taxes when there are no profits, forcing them to borrow to pay tax. It may therefore be considered whether we need exclusion from application of MAT for class of industry particularly for infrastructure and other projects with long gestation period.

In nutshell, these proposals would discourage investment in infrastructure sector at the time when there is a critical need to improve our deplorable infrastructure and provide boost to the recessionary economy.

(Rahul Garg is Executive Director and Richa Sawhney is Senior Manager - Tax and Regulatory Services in PricewaterhouseCoopers)

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