The scheduled phase-out of most corporate and non-corporate tax exemptions and deductions without a terminal date from April 1, 2017, along with the plan not to extend the “sunset dates” in other cases, would spur investments rather than hamper them, according to revenue secretary Hasmukh Adhia.
Allaying fears that the proposed gradual withdrawal of tax incentives could come into conflict with the imperative of boosting economic growth, he said: “As for companies which complete their investments by April 1, 2017 and (commence) production by that date, all the existing exemptions would continue (for whatever periods defined). This would actually expedite the investments in the short term in order to cope up with the deadline.”
The finance ministry had warned in the recent mid-year economic review report that as the reliance of growth on consumption buoyancy gradually diminished, the “ensuing growth was likely to be more investment-driven”. Despite some improvement in capital formation, the investment rate at around 28% (of gross domestic product) in the first half of this fiscal was 3 percentage points lower than the average in the three years through FY15, it had noted.
In an exclusive interview with FE, Adhia said the phase-out plan for tax incentives will not make the minimum alternate tax (MAT) redundant. “We cannot say that there would be no need for MAT as soon as the exemption window is closed. The revenue loss on account of exemptions is not going to disappear immediately. The government would get the full gain from exemption phase-out only by 2033,” he said. The official added: “We are closing the new window (for those entering after the respective sunset dates). But, people who are already in would get the benefits till the period of their exemption expires.”
MAT is currently levied at 18.5% on the book profit of companies. While the average effective rate of tax on corporate income is around 23%, much lower than the marginal rate of 30%, MAT serves as a threshold below which the tax incidence on profit-making firms can’t fall.
Pursuant to finance minister Arun Jaitley’s announcement in the FY16 Budget to reduce corporate tax to 25% from 30% over the subsequent four years, the Central Board of Direct Taxes (CBDT) in November came out with a blueprint for the phase-out of tax exemptions and various profit-and-investment-linked deductions.
“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,” the CBDT had said. It also stated that the accelerated depreciation would be brought down from up to 100% now to 60%, prompting many analysts to wonder whether these steps could further dampen corporate investments.
The quantum of tax incentive varies under different schemes. Once a firm joins a scheme, the period it can avail of the benefit ranges from seven to 20 years. 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) of the Income-Tax Act.
The revenue foregone on corporate tax incentives stood at Rs 98,400 crore in FY15. This was partly offset by the revenue from MAT of Rs 33,350 crore.
Although Adhia refused to comment on specific tax disputes including the high-profile ones involving Vodafone and Cairn, he reiterated that the government was open to conciliation to resolve disputes. “The government is open to the idea of conciliation, out-of-court settlement,” he said. Asked whether an offer to pay the tax component (the I-T department had demanded penalties and interest as well from Vodafione and Cairn) would be a prerequisite for the conciliation talks, he said: “I do not want to go into the details now. I can say that we are open to the idea of reconciliation and nothing more than that.”
Vodafone’s purchase of Hutch Essar from CGP Investments of Cayman Islands for $11 billion in 2007 led to a retrospective principal capital gains tax demand of over Rs 8,000 crore — interest and penalties accrued to the demand subsequently, taking the total claim to upwards of Rs 20,000 crore. Cairn UK Holdings had received a draft income reassessment order of $1/6 billion pertaining to the transfer of its Indian assets to Cairn India. Both cases have escalated into international arbitration; while both parties have appointed the arbitrators, umpire arbitrators have yet to be named. The 2012 amendments to the Income Tax Act, 1961, clearly made indirect transfer of Indian assets including those executed in previous years taxable in India.