R&D sop to go, depreciation benefit to reduce in new road map
The finance ministry will spell out the road map to phase out corporate tax exemptions and incentives in a fortnight, ruling out further extensions of the tax holidays for specific sectors such as power, oil & gas and infrastructure and the area-based tax waivers. The road map could also feature withdrawal of sops like weighted deduction of research expenses and a reduction in the marginal rate of tax for Indian branches of foreign companies from 40% at present to 35%, sources privy to the matter told FE.
In the last Budget, finance minister Arun Jaitely announced a reduction in the corporate tax rate from 30% to 25% over the next four years, but said that this would be accompanied by the elimination of exemptions that have allowed corporates to keep their effective tax rate much below the marginal rate. Launching the operations of Bandhan Bank in Kolkata on Sunday, Jaitley said the phased rate reduction would begin from the next financial year.
Sources said the seven-year tax holiday for power producers, transmitters and distribution companies would no longer be available to new entrants in the business after 2017. A power company that starts operation by March 31, 2017, will have time till 2032 to avail of the benefit in consecutive ten years in that period. The seven-year holiday for crude oil producers and refiners will be entirely grandfathered by 2022, meaning no new entrant in the sector after March 31, 2012, would be able to claim this incentive, the sources added.
Besides, the government would also specify a terminal date for withdrawing the ten-year tax holiday given to those setting up highways, airports and inland waterways projects.
Also, the extent of accelerated depreciation available to investments (section 32 of the Income Tax Act), such as plant and machinery in the fertiliser sector, that actually results in deferral of taxes in the initial years of a business, may be limited. However, the accelerated depreciation granted to units in backward districts of Andhra Pradesh, Telangana and Bihar would continue till 2020. The highly abused research and development incentive of 200% weighted deduction availed by pharmaceutical companies would go, the sources indicated.
Revenue secretary Shaktikanta Das, who confirmed to FE that the plan to phase out tax exemptions will be released for public comments within the next seven-eight days, added that this would be followed by a separate approach paper on how the corporate tax rate would be lowered to 25% by 2019 from the current 30%. Central Board of Direct Taxes (CBDT) chairperson Anita Kapur explained that once the exemptions are removed, there may no longer be a need for specifying the minimum alternate tax (MAT) for companies and alternate minimum tax (AMT) for other entities to reduce the gap between the marginal rate and the effective rate at which firms making use of various exemptions actually pay their taxes.
Sources said that along with reducing the corporate tax rate to 25%, the government is likely to lower the rate applicable on Indian branches of non-resident entities (most of the foreign banks such as ABN Amro and RBS are present in India as branches) to 35% from the current 40%. Globally, the difference in tax rate between resident entities and of branches of non-resident entities is 10 percentage points.
Experts see the reworking of the tax regime as an opportunity to woo global investors. “The government should consider granting a lower rate of corporate tax on the global income of businesses resident in India on the lines of the headquarter incentive given by Singapore in order to encourage more global investors setting up their base here,” said Rajiv Chugh, partner at EY.