Reviewed by Sep 30, 2020| Updated on
A phase-out refers to a gradual decline in the tax credit that is eligible for a taxpayer as his income approaches the qualifying limit for that credit. Usually, a specified income range will determine who would qualify for a specific tax credit. The lower-income group is eligible for the maximum amount and the higher income group is eligible for a minimal amount. A taxpayers income that exceeds the upper limit is ineligible for the credit.
However, under the Indian taxation context, we must understand another meaning. The Indian government, in its Budget 2019 presentation, made a statement. As per its objective for direct taxes in the medium term, it plans to phase out tax incentives, deductions, and exemptions while also simultaneously rationalising the tax rates. These incentives were usually linked to profits or investments, or could have been area-based.
Accordingly, the government will phase out the weighted deductions (expenditure) on scientific research and other eligible expenditures. One of them is the deduction of payment to approved scientific research association having an objective of undertaking scientific research and certain specified institutions. The quantum of the deduction from profits for the period 1 April 2017 to 31 March 2020 is 150% and thereafter standardised to 100%. This deduction is available under Section 35 of the Income Tax Act. Similarly, other sections related to profit-linked incentives underwent a change.
It must be noted that the departure in tax incentive can alternatively be a one-shot too, instead of a phased-out one.
There are benefits for a taxpayer from phasing out the tax incentives or tax holidays. Withdrawal of tax holidays can have a significant impact on the economy. By including the provisions for phase-out within the tax law, it provides a leeway for the business to earn and save enough profits and the burden of tax gets distributed across the taxable years. A sunset clause is added in the tax law by the government to phase out the tax incentives, usually during the Union Budget.