India has unveiled details of its plan to phase out some tax exemptions for companies as the government looks to simplify tax laws and make them transparent before it lowers the tax rate.
Over four years, the government plans to lower the corporate tax rate to 25 per cent from 30 per cent, Finance Minister Arun Jaitley said in his budget speech in February. During that period, exemptions and deductions will be phased out.
Profit-linked, investment-linked and area-based deductions will be phased out for both corporate and non-corporate tax payers, according to a document posted on the tax office's website. For tax incentives with no set date of termination, the government will set March 31, 2017 as the so-called sunset date, the tax office said.
This will apply to development, operation and maintenance of infrastructure facilities, development of special economic zones as well as commercial production of natural gas and mineral blocks, according to the document.
In addition, in several areas the sunset clause for a tax benefit would be advanced, while in segments where there is no deadline, the terminal date would be fixed as March 2017 either for commencement of activity or for claiming the benefit. Further, it said there would be no weighted deduction with effect from April 2017.
“Some of the proposals such as those related to accelerated depreciation and on development of SEZs, for instance, appear a little harsh since they were introduced to encourage investment. A gradual phase-out will be better since the reduction in tax rates is also gradual,” said Mukesh Butani, managing director, BMR Legal.
The discussion paper has suggested that the depreciation available for plant and machinery and intangible assets acquired by a power generator or distributor after April 1998 be reduced from 100% to 60% from April 2017.
The paper also listed that certain incentives would only be available if activity begins by March 2017. This includes benefits for road widening, SEZ development, export by units under SEZs, commercial production of natural gas in blocks licensed under CBMIV and NELP VIII as well as oil from blocks contracts awarded up to March 2011.
Similarly, weighted deduction on skill development activity by companies and on agriculture extension projects is proposed to be withdrawn from April 2017, although 100% deduction on these expenses would be allowed.
“While a majority of exemptions anyway have a sunset date (in terms of commencement of activity or production) of March 31, 2017, there are some that don't (eg SEZs); this will undoubtedly impact certain sectors and companies,” said Ketan Dalal, senior tax partner at PwC India.
In the budget, finance minister Arun Jaitley had announced the plan to prune the list of exemption in return of lower rates on the grounds that it would send a positive signal to investors. While the effective rate of taxation is around 23%, a 30% rate often conveys the impression that rates in India are higher than rival countries.
