How do exemptions or incentives become loopholes ?

One permanent feature of laws - Various small loopholes are sought to be plugged, huge glaring loopholes are left untouched.

Let me draw an analogy to taxation laws to explain. Over the years we have seen politicians and film stars becoming owners of poultry farms, hotels, software and other export firms, and agricultural land depending on the scope for laundering unaccounted income at minimum cost in the form of payment of taxes. (In markets - black and/or illegal money being routed through multiple sub-account registrations, p-notes etc)

Even today agricultural income is left untaxed (markets - companies doing pre-ipo placements at with institutions / FII generally at lower valuations) which is the reason why film stars, politicians are keen to acquire such land. I am sure our politicians must have acquired construction firms and multiplexes, to take advantage of the tax holidays for laundering their ill gotten gains.

One would argue that these exemptions are meant to incentivise certain types of economic activity and are not really loopholes. Most politicians or persons interested in laundering their money donot have the patience or the inclination to really carry out the concerned activity, and merely create paperwork to show such activity is being carried on, though it is not really so. The loop hole is therefore created due to inadequate verification of facts. A proper inquiry will certainly throw up the correct facts but unfortunately for obvious reasons, the will is often lacking. I however, continue to believe that good rules are bad substitutes for character.

I recollect having heard Mr.Nani Palkhiwala (one of this last few sessions on the budget which I had a chance to be part of) - "Bad economics may temporarily be good politics; but politics should be behind a fiscal law, and not in front of it."