Govt looking at slashing corporate tax rate to 25% from 30% over four years; experts say it will make India's headline tax rate competitive for attracting FDI and widen the tax base
In a move that could see India's tax environment becoming more conducive for investment, the government on Friday came out with a roadmap for phasing out exemptions and deductions availed by companies on levies to eventually rationalise the corporate tax.
This is in line with the finance minister Arun Jaitley's announcement in his Budget speech of bringing down the current corporate tax rate of 30% to 25% over the next four years.
The various suggestions proposed by the Central Board of Direct Taxes (CBDT) include gradually ending profit-linked, investment-linked and area-based deductions for both corporate and non-corporate tax payers, termination of sunset dates by March 31, 2017 for commencement of activity and benefit claims, doing away with weighted deductions on specified businesses from April 1, 2017, among others.
"This is a step towards simplification of tax laws, which is expected to bring about transparency and clarity," said the statement issued by the finance ministry.
Amit Maheshwari, partner at audit firm Ashok Maheshwary & Associates, said it was "very smart move" and would make India's headline tax rate competitive against other nations.
"When the FM announced the reduction, it was seen as a very smart move as the reduction would make the headline tax rate competitive vis-a-vis other nations competing for FDI," he said.
According to Maheshwari, lower corporate tax rate and its simplification will also widen the tax base and prune down the number of litigations related to exemptions.
"Historically, exemptions have been prone to litigation, which is also bound to decrease," he said.
Neeru Ahuja, partner, Deloitte Haskins & Sells LLP, believes the government measures will result in lower effective tax and spur investment activity.
"This will immediately bring down the effective tax caused for companies and is bound to increase investment activity in the country," she said in statement issued by the accountancy firm.
Ahuja, however, saw the phasing out of tax holidays as "the only worrying element" as far as the future of special economic zone (SEZ) was concerned.
"The only worrying element is the future of SEZs. SEZs had ceased to be popular since MAT (minimum alternative tax) had been imposed on them; but with this (phasing of tax holidays) announcement, it can be expected that there would be no further investments in SEZs," she said.
The details of CBDT proposals, uploaded on the income tax department's website for comments from various stakeholders within 15 days, also caps the depreciation rate under Income Tax Act at 60%, which would become applicable from April 1, 2017. Currently, the government allows depreciation rate up to 100% for certain blocks of assets.
It is also considering abolishing all weighted deductions, which are currently being availed by corporate India under Section 35AD of the I-T Act. Today, companies enjoy a 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 and others.
For cold-chain facility, warehousing facility for storage of agricultural produce, an affordable housing project, production of fertiliser and others, the weighted deduction is currently at 150% of capital expenditure.
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