A phasing out of accelerated depreciation and incentives for special economic zones could be among the first of the series of corporate tax exemptions that could be put on the block by the government in the Budget for 2016-17. This will set the ball rolling on the Centre’s plan to initiate a calibrated reduction in corporate tax rate over the next four years alongside a gradual phasing out of corporate tax exemptions.

Exemptions for some types of plant and machinery, research and development, cinematograph films, which account for the highest rates of depreciation of 100 per cent, are likely to face possible cuts in the Budget.

Govt may not extend sunset clauses for tax exemption, phase out area-based sopsRoadmap on phasing out corp tax waivers by December: Hasmukh AdhiaComing soon, a sunset clause on tax exemption8-10% growth rate achievable on back of increased investment: Arun JaitleyBringing tax down while pruning sops may raise corporate burdenCut in basic corporate tax but exemption list to be prunedGovt may not extend sunset clauses for tax exemption, phase out area-based sopsRoadmap on phasing out corp tax waivers by December: Hasmukh AdhiaComing soon, a sunset clause on tax exemption8-10% growth rate achievable on back of increased investment: Arun JaitleyBringing tax down while pruning sops may raise corporate burdenCut in basic corporate tax but exemption list to be prunedGovt may not extend sunset clauses for tax exemption, phase out area-based sopsRoadmap on phasing out corp tax waivers by December: Hasmukh AdhiaComing soon, a sunset clause on tax exemption8-10% growth rate achievable on back of increased investment: Arun JaitleyBringing tax down while pruning sops may raise corporate burdenCut in basic corporate tax but exemption list to be pruned

“The focus would be on eventually phasing out most of them (exemptions), other than those that incentivise savings,” an official involved in the exercise said.

Though the basic rate of corporate tax is 30 per cent, the effective rate is lower at around 23 per cent because of incentives for taxpayers. In 2014-15, the government is estimated to have foregone Rs 62,399 crore as incentives to corporate taxpayers, up from Rs 57,800 crore a year ago.

Export profits of units located in SEZs and the provision for accelerated depreciation accounted for the biggest hit on the Centre’s exchequer, for which the government is estimated to have foregone amounts to the tune of Rs 18,394 crore and Rs 37,010 crore respectively, or cumulatively 89 per cent of the Rs 62,399 crore that was provided as incentives to corporate taxpayers during 2014-15.
Experts, however, say that given the subdued investment activity in the economy, the government needs to balance phasing out deductions for corporate taxpayers, especially accelerated depreciation that act as incentives for many small businesses and new manufacturing units.

“The government has clarified that reduction in corporate tax rate will be accompanied with gradual reduction or phasing out of tax concessions to achieve parity in revenue collections and to bring in the much desired simplification in the tax code. However, withdrawal of tax concessions should be done judiciously, especially in sectors where we need investment to create employment and areas for sustainable development like renewable energy,” Vikas Vasal, Partner-Tax, KPMG India, said.

In the Budget for 2015-16, Finance Minister Arun Jaitley had announced reduction in corporate tax rate to 25 per cent over four years from 30 per cent at present along with simultaneous withdrawal of exemptions. Revenue Secretary Hasmukh Adhia had last week said the government is losing total Rs 2 lakh crore in direct and indirect tax exemptions, thereby curtailing the space to reduce income tax rate for taxpayers.
”We can’t completely eliminate exemptions… there are certain exemptions which may have to continue but there are certain others which may have to be reduced to the extent possible and if we are able to reduce the exemptions and the amount that we are able to lose in exemptions, we would be in a better position to reduce our taxation structure and taxation rate,” Adhia had said, adding that “…the exemptions create inequity, inequity between the new unit and existing unit, which is availing the exemption and it also creates exemption for smaller companies and bigger companies. The bigger companies are paying a much less effective rate of taxation compared to smaller companies.”

Adhia said if there is rationalisation of tax exemptions, then the tax-to-GDP ratio will also go up from the current ratio of 10.

Many tax experts suggest the government should consider fixing a sunset date rather than scrapping tax exemptions completely to boost manufacturing in the country.

“The phaseout of exemptions and deductions should be done over a period of time. Exemptions for some regions such as North-East may be difficult to reduce since the reduction in exemptions is not only a matter of tax policy but other factors also,” Deloitte Haskins & Sells LLP Partner C A Gupta said.

Vishal Shah, Partner-Tax at PricewaterhouseCoopers, said, “The challenge is to balance the objectives to boost capex or investment cycle and meeting the fiscal deficit target by phasing out exemptions and simultaneous reduction of corporate tax. The government should consider announcing a longer-term sunset clause in order to accommodate the long gestation period of infrastructure projects.”

In November, the Finance Ministry had unveiled a draft roadmap which had proposed that profit-linked, investment-linked and area-based deductions will be phased out for both corporate and non-corporate taxpayers. The Ministry proposed to reduce the highest rate of depreciation under the Income Tax Act from current 100 per cent to 60 per cent. The draft said that provisions having a sunset date will not be modified to advance the sunset date. Similarly, the sunset dates provided in the income Act will not be extended.

In case of tax incentives with no terminal date, a sunset date of March, 31, 2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the Act. There will be no weighted deduction with effect from April 1, 2017.