The Direct Taxes Code (DTC) Bill has proposed to substitute all profit-linked incentives with investment-linked incentives for businesses that enjoy tax sops under the existing law. Apart from developers of Special Economic Zones (SEZs) and units operating out of them, the proposal will also affect companies in power, infrastructure, food processing, hotel and hospital sectors, among others.
DTC will substitute profit-linked incentives with investment-based incentives wherein capital expenditure incurred for specified businesses will be allowed as a deductible expenditure. However, certain profit-linked tax incentives under the Income Tax Act are grandfathered in the DTC. This means certain profit-linked deductions currently available will be protected for unexpired period in the code.
Setting up and operating a cold chain and warehousing facility for the storage of agricultural produce will qualify for investment-linked tax incentives. The benefit will be extended to exploration and production of mineral or natural gas.
The investment-linked incentives will also apply to businesses involved in generation, transmission or distribution of power; developing or operating and maintaining any infrastructure facility; operating and maintaining a hospital in a specified area; processing, preservation and packaging of fruits and vegetables; and laying and operating of a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of the network.
Building and operating a new hotel of two-star plus category commencing operations on or after April 1, 2010 will get investment-based sops. A similar benefit will be given for building and operating a new hospital with at least 100 beds, and developing and building a housing project under slum redevelopment or rehabilitation scheme commencing operations on or after April 1, 2010. Deduction will be allowed on all capital expenditure, other than land, goodwill and financial instruments.
The government has found profit-linked incentives distortionary, inefficient and inequitable, thereby leading to increased administrative burden, revenue loss and litigation. Revenue secretary Sunil Mitra had said profit-linked deductions would be replaced by investment-linked deductions, with the provision for availing the unexpired portion of area-based and profit-linked deductions under the Income Tax Act.