Deduction of the Corporate Tax Rate Under the Income Tax Act

Deduction of the Corporate Tax Rate Under the Income Tax Act

Posted on Posted in Government Developments, Taxation

Introduction

The Finance Minister in his budget speech of 2015 mentioned that the basic rate of Corporate Tax in India is 30%, which is higher comparatively with other Asian economies. Whereas, the effective rate of tax in India is close to 23% due to higher exemptions given to the companies. Thus, this leads India to loose on both the fronts. It is considered as a higher corporate tax imposing country on one hand and it incurred a loss of revenue on the other hand due to higher exemptions given. Also another facet of the Indian Corporate tax regime was the leading of pressure groups, litigation and loss of revenue to the department due to the superfluous exemptions given to the Corporates. The revenue foregone due to exemptions and tax incentives for corporates in 2014-15 was around ₹62,400 crore.

Thus, the Finance Minister proposed to reduce the Corporate Tax Rate from the existing 30% to 25%. Also it was proposed to reduce the exemptions available to the Corporates through phasing out of various deductions in a planned manner. In this relation, the Central Board of Direct Taxes (CBDT) has issued a Press Release, where it is stated that it is a step towards the simplification of tax laws, which is expected to bring about more transparency and clarity.

A phasing out plan of deductions under Income-tax Act was placed in the public domain on 20th of November 2015. The stakeholders and general public have been requested to send their comments before 31st of December to the Director (TPL-III) on mail at dirtpl3@nic.in or by post at Director (TPL III), Central Board of Direct Taxes, Room No. 147G, North Block, New Delhi- 110001.

Proposed plan to phase out deductions:

The government proposes to implement this decision in the following manner:

  • Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers.
  • The provisions having a sunset date will not be modified to advance the sunset date. Similarly the sunset dates provided in the Act will not be extended.
  • In case of tax incentives with no terminal date, a sunset date of 31.3.2017 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 01.04.2017.

The details of phasing out plan to be implemented are as under:

Section 32: The depreciation under the Income-tax Act is available up to 100% in respect of certain block of assets. The highest rate of depreciation under the Income-tax Act is  proposed to be reduced to 60%. This is proposed to be made applicable from 01.4.2017.  The new rate is proposed to be made applicable to all the assets (whether old or new)  falling in the relevant block of assets.

Section 35AD of the Income-tax Act provides for 100% deduction of capital expenditure (other than expenditure on land, goodwill and financial assets) incurred by certain specified businesses such as laying and operating a cross-country natural gas or crude or petroleum oil pipeline network, building hotel (two star and above), warehousing facility for sugar etc. However, in case of a cold chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertilizer etc. weighted deduction of 150% of capital expenditure is allowed. It is proposed that no weighted deduction will be allowed on any specified business w.e.f 01.04.2017.

Section 35AC: No deduction under section 35AC will be available from financial year 2017- 18 (Assessment Year 2018-19).

Section 35 of the Income-tax Act provides for deduction for expenditure incurred on scientific research. It allows for both capital and revenue expenditure and also allows for weighted deduction for donations made to certain institutions/associations/company for scientific research. 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% from F.Y 2017-18, and

(b) deduction under section 35(2AB) of the Income-tax Act is proposed to be limited to  100% from Financial Year 2017-18 as against 200% available up to 31.03.2017 under the Income-tax Act.

There are certain tax incentives which at present do not have any sunset date for commencement of activity. It is proposed to provide a sunset date of 31.03.2017 for commencement of activity in the following cases:-

  1. Development, operation and maintenance of infrastructure facility [Section 80-IA (4)(i)].
  2. Development of special economic zone (Section 80-IAB).
  3. Export of articles or things or services by a unit located in a Special Economic Zone (Section 10AA).
  4. Commercial production of natural gas in blocks licenced under CBM-IV and NELP VIII. [Section 80-IB(9)(iv)&(v)].
  5. Commercial production of mineral oil from blocks licensed under a contract awarded up to 31.03.2011. [Section 80-IB(9)(ii)].

   No weighted deduction is proposed to be provided under Section 35CCC and 35CCD from          01.04.2017. However deduction up to 100% of expenditure referred to therein shall be            available.

Conclusion:

The main purpose of providing the deduction and tax incentive was to advance the social & economic well-being of the society as well as that of the industries in India. But it is been often misused just for the purpose of tax saving & therefore the benefits of the same are not advanced to the society and public at large. Therefore the main purpose for providing the deduction gets defeated.

Also many companies have heavily invested in projects considering the available tax benefits. Expunging of the available tax benefits may entail financial risk thereby forcing them to recast their financial planning into more value based approach rather than taxation base approach as a growth strategy.

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