Finance minister Arun Jaitley, who is planning cut the corporate tax rate to 25% from the current 30% over the next four years, has chosen to remove in one go most of the tax exemptions contributing to a substantial part of the government’s tax expenditure (revenue forgone due to incentives) from April 1, 2017, itself. The roadmap for phasing out corporate tax incentives released by the tax department on Friday however, has suggested withdrawal of major tax breaks from April 1, 2017, rather than from next fiscal.
As per the blueprint, all tax corporate incentives for which no end date has been specified in the law — such as developing special economic zones and setting up units there, construction of highways and production of natural gas and crude oil from specified blocks — will be phased out from April 1, 2017. This is on top of the sharp cuts in the 100% accelerated depreciation now allowed for some investments and the weighted deduction allowed for R&D expenses as well as for agriculture extension and skill development projects, which also kick in from April 1, 2017.
Although not explicitly mentioned in the roadmap, in the case of infrastructure, SEZ and oil and gas industries, those entities that operationalise their facility before the ‘sunset date’ of March 31, 2017, would be eligible for the seven- to 10-year tax exemption for the remaining applicable period as specified in the I-T Act.
Rahul Garg, partner and leader of direct taxes, PwC India, said the withdrawal of exemptions should be in sync with the reduction in tax rate.
“The provisions (in the Income Tax Act) having a sunset date will not be modified to advance the sunset date. Similarly, the sunset dates provided in the Act will not be extended,” said the roadmap.
The extent of the tax incentive — the amount of profits from the specified business that can be deducted from the company’s total taxable income — vary for different industries. These benefits are outlined in sections 80 IA (infrastructure development), 80 IAB (SEZ development), 10 AA (setting up SEZ units), 80 IB (natural gas production from CBM 4 and Nelp 8 blocks) and 80 IB (crude oil production).
Jaitley had announced this February in his Budget speech that the corporate tax would be lowered to 25% over the next four years, accompanied by phasing out of tax breaks as the country presently has the image of a high-tax market although the effective tax rate on account of tax breaks has been as low as 23%. Exemptions have also give rise to tax disputes. The Rs 33,351 crore collected by way of an 18.5% minimum alternate tax on companies that make excessive use of incentives has only helped the revenue department in lowering its revenue forgone to Rs 62,399 crore in 2014-15. Without adjusting for MAT, the figure would touch Rs 98,408 crore.
Riaz Thingna, partner, Walker Chandiok & Co, said that since some exemptions like Section 10A have been designed to encourage substantial capital investment, it would be recommended that higher depreciation rates may be permitted to compensate such units and support investment.
Neeru Ahuja, partner, Deloitte Haskins & Sells, said, “As far as phasing out of tax holidays is concerned, the only worrying element is the future of SEZs. SEZs had ceased to be popular since MAT had been imposed on them, but with this announcement it can be expected that there would be no further investments in SEZs. Other than this, there are not many other tax holidays which were being availed by general businesses.”
The withdrawal of benefits under Section 35AD would mean full or partial deduction of capital expenditure incurred in setting up cross-country natural gas pipelines, hotels, affordable housing, semiconductor wafer factories, fertiliser plants and container freight stations would not be available after 2017.
“The reduction would make the headline tax rate competitive vis-a-vis other nations competing for FDI. The tax base is also expected to be widened because of a lower tax rate. Also, by saying that sunset dates would not be extended, the finance minister has put to rest the expectations and brought out certainty on this aspect,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.
Ketan Dalal, senior tax partner, PwC India, said the March 31, 2017, sunset date needs more clarity. “Where the relevant activity or project commences on or before March 31, 2017, the incomes beyond that from such activity or project should continue to be exempt for the period envisaged in the exemption, since commercial decisions have been initiated on that basis.”