The Centre is likely to retain income tax deductions on export profits in this year's Budget.

Finance Minister Jaswant Singh is expected to retain the exemptions under Sections 10A and 10B of the Income-Tax Act, 1961, which make 90 per cent of export profits tax exempt.

The export incentives were criticised by the task force on direct taxes headed by Vijay Kelkar, adviser to the finance minister.

However, Jaswant Singh is expected to go by the recommendations of the commerce ministry and several export councils.

The retention of the tax exemption will invalidate the suggestion of the Kelkar committee to allow the incentive only for software exports.

Section 10A provides the exemption to companies operating in special economic zones and technology parks, and Section 10B offers the deduction to units exporting all their output, wherever they be located.

The exemptions apply for 10 years from the time a unit commences operation. However, the Budget for 2002-03 stated that from April 1, 2003, new undertakings would be entitled to a 100 per cent tax deduction on 90 per cent of their profits for five years, and a 50 per cent deduction for the next two years.

The Kelkar task force argued that the incentive encouraged manufacturers to shift to special economic zones, without any gain for the country.

It also pointed out that the tax treatment of exports was too complex to be solved by exemptions.

However, the committee suggested that the government either allow full credit for taxes paid by software exporters abroad or continue with the incentives till a "totalisation agreement" was reached with the importing nations.

But exporters' associations had said such treatment would discriminate against other exporters.

The commerce ministry felt that since earlier Budgets had announced the continuation of tax concessions, the government would lose credibility if it went back on this.