1. Chapter XII of the Discussion Paper on Tax Incentives deals specifically with the grandfathering of area based exemptions. It has been stated that the case for area based exemption is based on the consideration of balanced regional development. However, such area based exemptions create economic distortion, i.e., allocate/ divert resources to areas where there is no comparative advantage. Such exemptions also lead to tax evasion and avoidance. Besides, there is a huge cost of administration. Hence, the Code does not allow area-based exemptions. Area-based exemptions that are available under the Income Tax Act, 1961 will be grandfathered.

2. It has been pointed out that while the current profit linked deductions available to developers of Special Economic Zones (SEZs) have been protected for their unexpired period in the DTC, there is no mention of grandfathering of these profit linked deductions in the case of units operating in these SEZs.

3. Profit linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one. As a policy, it has, therefore, been decided not to extend the scope or the period of profit linked deductions. However, specific provisions for protecting such deduction for the unexpired period have been provided in the DTC in the case of SEZ developers. A similar provision to protect profit linked deductions of units already operating in SEZs for the unexpired period will also be incorporated. Profit-linked deductions grandfathering preserves existing SEZ developer and unit deductions for unexpired periods under DTC. The Discussion Paper excludes area-based exemptions from the DTC while grandfathering existing exemptions under the Income Tax Act, and treats profit-linked deductions as distortionary without extending them; it provides grandfathering for SEZ developers' unexpired deductions and will incorporate similar protection for units operating in SEZs to preserve their unexpired profit-linked deductions.