Wednesday, February 10, 2016

Proposed Changes in Corporate Tax – A Brief Overview

[The following guest post is contributed by Ananya Banerjee, a 5th Year Student of University of Calcutta, Department of Law]

After the Budget Speech, 2015 of the Finance Minister, the Income Tax Department has come out with a phasing out plan under the Income Tax Act. In the Speech, the Minister indicated that the corporate tax burden will be reduced from 30% to 25% in the next four years. But, along with the reduction of tax burden, the Government will also gradually phase out exemptions and deductions available to both corporate and non-corporate tax payers. The proposed amendment is aimed at simplifying the tax laws and bringing transparency and clarity to the existing system.

Manner of Phasing Out

The Government has proposed to implement the changes by:

(i)        Phasing out profit linked, investment linked and area based deductions, for both corporate and non-corporate tax payers;

(ii)       Not extending the sunset dates provided in the Income Tax Act, and not modifying any provision having sunset date;

(iii)      Incentives that are provided without any terminal date shall have a sunset date of March 31, 2017, which would be provided for either commencing a certain activity or for claiming any benefit under the incentive;

(iv)      Weighted deductions will be no longer available from the start of financial year 2017-18.

Details of Phasing Out

Depreciation

Section 32 of the Income Tax Act lays down the details of depreciation available under the Act. In certain block of assets, such depreciation is allowed upto 100%. This ceiling is proposed to be brought down to 60% from the start of financial year 2017-18.

Deduction in Respect of Expenditure

While 100% deduction is provided for capital expenditure, other than expenditure on land, goodwill and financial assets, incurred by certain businesses specified under Section 35AD of the Act, certain other specified businesses enjoy 150% weighted deduction on such capital expenditure. It is proposed that from the start of financial year 2017-18, no such weighted deduction would be available.

Expenditure on Eligible Projects or Schemes

Section 35AC provides certain deductions for any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme. It is proposed that no deduction under this Section shall be available from April 01, 2017.

Expenditure on Scientific Research

Section 35 of the Income Tax Act provides for deduction for expenditure incurred on scientific research. The provisions of this Section allow deduction for both capital and revenue expenditure as well as weighted deduction for donations made to certain notified institutions. It is proposed that the limit of deduction shall be restricted to 100% from the 2017-18 financial year and the 200% deduction available for companies engaged in the business of bio-technology or any business of manufacture or production of certain things notified under the Eleventh Schedule, would be reduced to 100% from the same financial year.

Expenditure on Other Projects

The weighted deductions available under Section 35CCC and 35CCD of the Act to the agricultural extension projects and skill development projects respectively, would also be reduced to a ceiling of 100% deduction.

Sunset Date

The tax incentives which do not have any sunset date (a terminal date) for commencing their activities, would be brought under a timeframe for which, April 01, 2017 is proposed to be the sunset date. It means, the deductions provided under several activities listed below, would have to commence their respective activities by the start of financial year 2017-18.

(i)        Development, operation and maintenance of infrastructure facility as provided under Section 80-IA of the Act;

(ii)       Development of Special Economic Zone (“SEZ”), provided under Section 80-IAB;

(iii)      Export of articles or things or services by a unit located in a SEZ, as provided under Section 10AA; and

(iv)      Commercial production of

(a)        Natural gas in blocks licensed under CBM-IV and NELP VIII, and

(b)       Mineral oil from blocks licensed under a contract awarded up to 31.03.2011, as provided under Section 80-IB of the Act.

Analysis

However, the Commerce Ministry, in its Budget recommendations, has rooted for the continuance of incentives and non-applicability of the sunset clause for SEZ sector stating that otherwise, export and employment generation would be adversely affected. In addition to the foregoing, according to industry experts, bringing SEZ under the purview of sunset clause, would also impact large-scale investments in this sector. With the already slowing down SEZ sector affected by the imposition of Minimum Alternate Tax and Dividend Distribution Tax, applying the sunset clause is expected to impact this sector even more harshly. In order to improve export situation, it is pertinent that the Finance Ministry look into this proposal once again.

The proposal made by the Finance Ministry was open for comments of the stakeholders and several other Ministries and industry experts have criticized various parts of this proposal. However, some of the provisions have also been welcomed. The extent and manner, in which this proposal would be implemented, would only be clear during the upcoming Budget.

- Ananya Banerjee


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