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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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