It may be noted that finance minister P Chidambaram had revised the depreciation rates in Budget 2005-06 arguing that a liberal depreciation policy had allowed a number of profit-making companies to continue to pay low tax. Rate of depreciation was cut from 25% to 15% for general machinery and plant, and initial depreciation rate was increased to 20% from 10%. Tax experts had pointed out that revision of rates would enhance the taxable income of companies with substantial opening block of assets, and lead to increased tax burden, despite the 5% cut in corporate income tax rate. Of course, the higher initial depreciation rate would be beneficial to companies making significant fresh capital investments.
Government sources said the decision to exempt TUFS investment in textile sector from the new rates has been taken, considering the investment boom the sector has begun to witness. Also, it is reckoned that the liberal depreciation rates benefitted companies employing capital rather than labour and was not very relevant for the textile industry which is both capital- and labour intensive.
With the quota-free global trade regime in, the domestic textile industry is in the throes of correcting the imbalances in the value chain by infusing funds.