CBDT proposes roadmap for elimination of tax exemption

Preparing the ground for gradual reduction of corporate tax to 25 per cent from 30 per cent, the Finance Ministry today proposed a roadmap for ending various tax exemptions currently enjoyed by the industry.
According to proposal of Central Board of Direct Taxes (CBDT), sunset clauses with regards to tax exemptions will be renewed and no weighted deduction will be allowed for any specified business activity from April 1, 2017 onwards.
"The provisions having a sunset date will not be modified to advance the sunset date. Similarly, the sunset dates provided in the Act will not be extended.
"In case of tax incentives with no terminal date, a sunset date of March 31, 2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the (Income Tax) Act," the CBDT has proposed.

The sunset clause date of March 31, 2017 will apply on tax exemptions provided for activities concerning infrastructure, special economic zone, commercial production of natural and mineral oil.
Further, CBDT proposed that "profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers". The CBDT has invited comments on the proposal in 15 days.

Finance Minister Arun Jaitley had announced in his last Budget speech that the rate of corporate tax will be reduced from 30 per cent to 25 per cent over the next four years along with corresponding phasing out of exemptions and deductions.

This, he had said, was a step towards simplification of tax laws, which is expected to bring about transparency and clarity.
Commenting on the proposal, Amit Maheshwari, Partner, Ashok Maheshwary and Associates said: "Tax reduction would make the headline tax rate competitive vis-a-vis other nations competing for FDI. The tax base is also expected to be widened because of lower tax rate."
Elaborating on the proposed roadmap, CBDT said the depreciation under the Income-tax Act is available up to 100 per cent in respect of certain block of assets.
"The highest rate of depreciation under the Income-tax Act is proposed to be reduced to 60 per cent (from April 1, 2017). The new rate is proposed to be made applicable to all the assets (whether old or new) falling in the relevant block of assets," it said.

It proposes to do away with 100 per cent deduction of capital expenditure on incurred by specified businesses such as laying and operating a cross country natural gas or crude or petroleum oil pipeline network, building hotel, warehousing facility for sugar with effect from April 2017.
Talking to reporters on the CBDT's proposal, Minister of
State for Finance Jayant Sinha said government's goal is to be able to simplify and make tax code as predictable as possible.
"We know that much of the litigations, many of the disputes that exist on the corporate side are because of the exemptions. Our goal is to simplify and streamline the exemptions on one hand and obviously on other hand bring down the tax rate as well," he said.

CBDT further said it proposes to restrict tax exemption on capital and revenue expenditure on scientific research to 100 per cent from April 2017.
Also, it proposes to withdraw tax deduction under Section 35AC of Income Tax Act from 2017-18 (Assessment Year 2018-19) given for eligible projects or schemes.
Neeru Ahuja, Partner, Deloitte Haskins & Sells LLP, said it is a "welcome news" that the Finance Ministry has retaliated the intention which was communicated by the finance minister in his budget speech.
"As promised, it clearly says the base tax rate for companies would be reduced from 30 per cent to 25 per cent. This will immediately bring down the effective tax rate for companies and is bound to increase investment activity in the country," she said.

As far as phasing out of tax holidays is concerned, Ahuja said 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. Other than this, there are not many other tax holidays which were being availed by general businesses," she said.