Incentives such as accelerated depreciation and deductions for research and development (R&D) expenses will be among the first tax sops to be withdrawn by the government as it moves towards a 25% rate of corporate tax, sources familiar with the development said. The revenue forgone by the government on account of these two sops amounted to Rs 45,137 crore in FY15 and Rs 41,805 crore in FY14.
The government is unlikely to immediately touch exemptions, the removal of which might have legal implications such as incentives for special economic zones under Sections 10A and 10AA, sources explained. The revenue forgone on account of these concessions amounted to Rs 17,036 crore in FY14. Finance minister Arun Jaitley had announced in the Budget for 2015-16 that the rate of corporation tax, currently levied at 30%, would be gradually lowered to 25% over five years starting 2016-17. According to government data, 263 companies with a profit before tax of more than Rs 500 crore account for 54% of corporate tax collections.
The blueprint that the finance ministry is working on is expected to suggest that expiry dates for tax breaks given to large infrastructure sector players in the oil and gas and power sectors — production, transmission and distribution — not be extended. While the expiry date for such sops for crude oil production and refining was March 31, 2012, for
the power sector it is March 31, 2017.
However, those players that have started availing of the tax benefits before the expiry date will be allowed to take advantage of these for the full period. This is seven years for the oil and gas sector and 10 years for the power sector.
These exemptions fall under Section 80IB, which also offers benefits to other industrial units in backward areas.
The government now allows 100% investment-linked deduction or accelerated depreciation for investments in sectors such as fertilisers to encourage new players, which leads to a deferral of taxes. Pharmaceutical and automobile businesses currently enjoy a 200% weighted deduction of their R&D spending while calculating their taxable income. Government sources said that in many cases firms include litigation expenses in the research cost, which inflates the deduction claimed.
The Central Board of Direct Taxes would like to plug what they believe is a loophole. “Much of the litigation relates to tax exemptions,” a senior finance ministry official said, adding that “removing exemptions and lowering the tax rate is a better way to incentivise companies”.