The Centre today put out a roadmap to end exemptions and deductions as part of its effort to make the tax rates competitive.
In Budget 2015-16, Finance Minister Arun Jaitley had set for himself the target of reducing the corporate tax rate to 25 per cent over the next four years from the current 30 per cent. This was to go hand-in-hand with a phasing out of exemptions and deductions, making the tax laws simpler. Jaitley had said then: “A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion…”The revenue foregone due to exemptions and tax incentives for corporates in 2014-15 was around ?62,400 crore. In what it called a “step towards simplification of tax laws which is expected to bring about transparency and clarity,” the Central Board of Direct Taxes (CBDT), in a statement on Friday, said all profit-linked, investment-linked and area-based deductions for both corporate and non-corporate taxpayers would be phased out.
Depreciation rate
The new plan includes reducing the maximum allowed depreciation rate, from 100 per cent on some assets to 60 per cent from April 1, 2017. The new rate will apply to all assets, new or old. Similarly, the government wants to end weighted deductions, which amount to as much as 150 per cent in the case of capital expenditure on warehousing facility for farm produce and fertilisers, or on Research and Development spending.
That is, firms are allowed tax-breaks worth ?150 even if they have spent only ?100.
While the sunset date for an incentive will not be extended, in the case of sectors where no terminal date has been specified, the sunset date would be March 31, 2017. A key worry for corporates would be whether they will pay more or less. At present, though the tax rate is 30 per cent, post deductions/exemptions the effective rate would be 22-23 per cent.
According to a CII statement issued earlier, at the proposed 25 per cent, the effective rate would be around 29 per cent sans the sops plus the surcharge and education cess.
Commenting on the proposed roadmap, Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a chartered accountancy firm, said reduction in corporate tax rate would make the headline tax rate competitive vis-à-vis other nations competing for foreign direct investment (FDI).