A surprised India Inc hopes for corporate tax rate cut in 2016

India Inc seems to have been taken by surprise by the government's plans to reduce corporate tax breaks. It expects a cut in tax rates, too. "Industry expected government to phase out tax incentives, along with a simultaneous reduction in corporate tax rate," said Rahul Garg, partner and leader, direct tax, PwC India.

That may happen if the government announces reduction in corporate tax rate in its Budget proposals for 2016. Some tax experts believe this move will pressure the government to announce at least one per cent reduction in corporate tax in Budget 2016. In Budget 2015, the finance minister had promised to reduce the corporate tax from 30 per cent to 25 per cent over the next three to four years.

Tax experts said companies that were enjoying profit-linked, investment-linked and area-based deduction would be exposed to higher rate of tax - in the range of 25 to 30 per cent - after expiry of the existing sunset clause. Those that kick-start before the March 2017 cut-off date could claim the existing incentives.

However, capital-intensive projects, especially those in infrastructure and power sectors, with long gestation periods, are unlikely to enjoy the benefits, noted Gokul Chaudhri, leader, direct tax, BMR & Associates. Experts said one would have to assess the changes in the depreciation rate along with the effective tax rate to gauge the full impact of the move on a company's finances.

Many feel the proposed move may sound the death knell for Special Economic Zones (SEZs), unless the government comes up with non-tax incentives for businesses to operate out of SEZs. "As there will be no incentive for industry to go to SEZs, this will add to uncertainty around the concept," said Neeru Ahuja, partner, Deloitte, Haskins & Sells. Research and development in the pharma sector is likely to take a hit with a reduction in incentives, she added.

Consumer durables and food companies operating in backward regions would also be affected. Some are still not convinced whether the government should paint all sectors with one brush while taking away tax incentives. "It should first do an impact assessment of this move on sectors that need support to stand on their feet," said Rakesh Nangia, managing partner, Nangia & Co. They would need some non-tax support to help them make viable, say tax experts.

Many in the industry feel that the government needs to build a stronger case for introducing GST in 2016 as part of overall tax reforms.