Most corporate tax breaks may be phased out in FY18

Draft schedule released by CBDT says sunset clause may not be extended

The finance ministry has proposed a road map on making tax rates more competitive and proposed phase-out of most of the exemptions from the 2017-18 financial year. This is in tune with this year’s Budget announcement that the corporate tax rates would be reduced to 25 per cent over the next four years from 30 per cent at present but would be accompanied by a corresponding phase-out of exemptions and deductions.

The draft schedule for phasing out these exemptions was put in the public domain by the Central Board of Direct Taxes on Friday. It has invited comments within the next 15 days.

The road map says profit-linked, investment-linked and area-based deductions would be done away with for corporate and non-corporate tax payers.

Provisions with a sunset date would not be extended or advanced. For incentives with no terminal date, a sunset date of March 31, 2017, would be provided for commencement of the activity or for claim of benefit.

Experts pointed out that the sunset date of March 31, 2017, needed more clarity. “... where the relevant activity or project commences on or before March 31, 2017, the incomes beyond that from such activity should continue to be exempt for the period envisaged in the exemption, since commercial decisions have been initiated on that basis,” said Ketan Dalal, senior tax partner, PricewaterhouseCoopers India.

Corporate tax is 30 per cent but is effectively 23 per cent, due to many exemptions and deductions. In 2014-15 the government is estimated to have forgone revenue worth Rs 62,398 crore in corporate taxes on account of various incentives, up from Rs 57,793 crore a year ago.

Minister of State for Finance Jayant Sinha says the  government’s goal is to be able to simplify and make the tax code as predictable as possible.

The sunset clause would cover tax exemptions for development, operation and maintenance of infrastructure facilities or development of special economic zone (SEZ) export unit. It would also cover commercial production of natural gas in blocks licensed under the fourth round of auctions for coal bed methane, the eighth round of the New Exploration and Licensing Policy and commercial production of mineral oil from blocks licensed under a contract awarded up to March 31, 2011.

Experts pointed out that the move will adversely impact investments into the SEZs that already lost sheen after imposition of the minimum alternate tax in 2011. “As far as phasing out of tax holidays is concerned, the only worrying element is the future of SEZs. SEZs had ceased to be popular since MAT had been imposed on them; but with this announcement it can be expected that there would be no further investments in SEZs,”said Neeru Ahuja, partner, Deloitte Haskins & Sells.

Amit Maheshwari, managing partner, Ashok Maheshwari & Associates, also pointed out that the move will be a dampener for SEZs.

In a setback to non-government organisations (NGOs), the road map also proposes to do away with the deductions available to NGO donors from 2017-18, which means 2018-19 assessment year, under Section 35AC of the I-T Act.

The government gives a depreciation rate up to 100 per cent on buildings, machinery, plant or furniture owned by an assessee for a business or profession. The rate would be reduced to 60 per cent from April 2017.

There would also be no weighted deduction with effect from April 2017. At present, in the case of a cold-chain facility, a warehousing facility for storage of agricultural produce, an affordable housing project or production of fertiliser, a weighted deduction of 150 per cent of the capital expenditure is allowed. The road map suggests it be done away with April 2017.

Similarly, a deduction of 200 per cent that is given for scientific in-house research would be cut to 100 per cent from April 2017. There are similar cuts proposed for donations to skill training programmes.

Meanwhile, tax deductions available for donations made to political parties and charitable institutions will continue as those were not mentioned in the draft. Also, the benefits for units set up in northeast states, Uttarakhand or Himachal Pradesh will continue.