Coming soon, a sunset clause on tax exemption

By: | Published: October 10, 2015 8:19 AM

The income tax department is planning to introduce a sunset clause for open-ended corporate tax exemptions while simultanously pruning the list of sectors that are entitled to such benefits on research and development, and capital expenditure.

taxTax experts say that while the move is welcome, the government should undertake a thorough study of the exemptions and ensure that industry is consulted to avoid litigation.(Photo: Reuters)

The income tax department is planning to introduce a sunset clause for open-ended corporate tax exemptions while simultanously pruning the list of sectors that are entitled to such benefits on research and development, and capital expenditure.

These steps have been outlined in the road map being readied by the department for phasing out corporate exemptions and are likely to figure in the Union Budget for the next fiscal to be presented in February 2016.

By doing away with all exemptions, the government hopes to lower the corporate tax rate and also free up funds to give a push to investment, growth and job creation. According to government data, revenue foregone in the form of incentives and tax exemptions to corporates in 2014-15 grew nearly 8 per cent year-on-year to over
Rs 62,398 crore.

The plan to institute a roadmap for deciding the fate of corporate tax exemptions was announced by finance minister Arun Jaitley in his Budget speech in February 2015. The exemptions have been categorised as the ones having a sunset clause, those that are open-ended and the ones that have outlived their utility but still continue to be a part of the Income Tax Act.

The government plans to phase out the exemptions in tranches and the blueprint for the same is likely to be a part of the Budget 2016-17, a government official told The Indian Express.

“It has been sent to the finance minister for his perusal. Based on the report, the consultations with stakeholders will start soon. The revenue secretary has already held one meeting and industry chambers have been told to put down their concerns before the government within a month,” the official added.

In the Budget 2015-16, Jaitley had announced that the corporate tax rate would be reduced to 25 per cent in the next
four years from the current 30 per cent while the tax exemptions and incentives would be removed.

“The basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive. Moreover, the effective collection of corporate tax is about 23 per cent. We lose out on both counts, i.e. we are considered as having a high corporate tax regime but we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue,” Jaitley had said in his Budget speech.

“In the first phase, the exemptions which are not needed any more will be removed, in the second phase all open-ended exemptions would be given sunset dates, third phase would see rationalisation of exemptions given for capita-linked expenditure and R&D and lastly, the government will rationalise the accelerated depreciation which in some cases is as high as 100 per cent,” the official said.

Tax experts say that while the move is welcome, the government should undertake a thorough study of the exemptions and ensure that industry is consulted to avoid litigation.

“I believe capital-linked deductions and deductions on R&D should be retained, like in the UK. Further, to phase out the exemptions having sunset clause, more research needs to be done to see how useful they have been and see if the revenue foregone justifies the development in backward areas or in terms of employment generated. The department also needs to see how will the phasing out impact the continuity of businesses,” Sudhir Kapadia, partner, EY, said.

According to the officia data, revenue foregone on deduction of profits of undertakings engaged in generation, transmission and distribution of power was Rs 10,606.9 crore in 2014-15 compared to Rs 9,824 crore in the last fiscal year. Similarly, revenue foregone on deductions of profit of industrial undertakings derived from production of mineral oil and natural gas stood at Rs 6,742 crore in the current fiscal.

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