The finance ministry on Friday announced the road map for phasing out several exemptions - including reduced benefit of accelerated depreciation in some sectors and ending sops for development of SEZs that are not operational over the next 16 months -from April 2017 as part of its plan to cut the corporation tax rate from 30% to 25%, as announced in the budget.
A discussion paper floated by the government outlined the broad theme and said the plan was to phase out profit-linked, investment-linked and area-based deductions for corporate and non-corporate taxpayers.
In addition, in several areas the sunset clause for a tax benefit would be advanced, while in segments where there is no deadline, the terminal date would be fixed as March 2017 either for commencement of activity or for claiming the benefit. Further, it said there will be no weighted deduction with effect from April 2017.
"Some of the proposals such as those related to accelerated depreciation and on development of SEZs, for instance, appear a little harsh since they were introduced to encourage investment. A gradual phase-out will be better since the reduction in tax rates is also gradual," said Mukesh Butani, managing director, BMR Legal.
The discussion paper has suggested that the deprecia tion available for plant and machinery and intangible as sets acquired by a power generator or distributor after April 1998 be reduced from 100% to 60% from April 2017.
Some pruning of benefits for spend on scientific research is also proposed.
The paper also listed that certain incentives would only be available if activity begins by March 2017. This includes benefits for road widening, SEZ development, export by units under SEZs, commercial production of natural gas in blocks licenced under CBMIV and NELP VIII as well as oil from blocks contracts awarded up to March 2011.
Similarly , weighted deduction on skill development activity by companies and on agriculture extension projects is proposed to be withdrawn from April 2017, although 100% deduction on these expenses would be allowed.
"While a majority of exemptions anyway have a sunset date (in terms of commencement of activity or production) of March 31, 2017, there are some that don't (eg SEZs); this will undoubtedly impact certain sectors and companies," said Ketan Dalal, senior tax partner at PwC India.
In the budget, finance minister Arun Jaitley had announced the plan to prune the list of exemption in return of lower rates on the grounds that it would send a positive signal to investors. While the effective rate of taxation is around 23%, a 30% rate often conveys the impression that rates in India are higher than rival countries.