Govt to phase out profit, investment linked incentives

Keeping up the reforms momentum, India has a announced a detailed plan to phase out tax exemptions and bring down corporate tax rate to 25% from 30% now.

In his February budget speech, Jaitley had announced that the government would cut the corporate tax rate to 25% while phasing out incentives.

According to the finance minister, the basic rate of corporate tax of 30 percent in India was higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive.

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 tax payers. “A gradual phaseout will be better since the reduction in tax rates is also gradual”, said Mukesh Butani, managing director, BMR Legal. “The tax base is also expected to be widened because of lower tax rate”.

Rahul Garg, Leader, Direct Tax, PwC, says, “One thing that is not clear from the proposal is whether they would allow the existing beneficiaries to avail the exemptions even after 31 March 2017”. “I personally feel you can not take a view that all exemptions should be phased out”, he said.

“The provisions having a sunset will not be modified”, the note said. “It is proposed that no weighted deduction will be allowed on any specified business with effect from April 2017”. The new rate is proposed to be made applicable to all the assets (whether old or new) falling in the relevant block of assets.

Similarly, in the case of capital expenditure, the government intends to do away with weighed deductions, which amount to as mush as 150 percent in a few cases such as warehousing facility for farm produce and fertilisers.

The sunset clause date of March 31, 2017 will apply on tax exemptions provided for activities concerning infrastructure, special economic zone, commercial production of natural and mineral oil. It is proposed to provide that (a) deduction under section 35(1)(ii), (iia), (iii) and 35 (2AA) is proposed to be restricted to 100 per cent from FY18, and (b) deduction under section 35(2AB) of the Income-tax Act is proposed to be limited to 100 per cent from FY18 as against 200 per cent available up to March 31, 2017, under the Income-tax Act. Companies at present get a 200% deduction on the expenditure incurred on R&D.