Scope For Misuse Of Depreciation Norms Remains

The draft Companies Bill, 1997, has left the existing depreciation norms untouched, ignoring calls to rationalise the rates and slabs prescribed in the Companies Act, 1956. The differing depreciation norms under the Companies Act and the Income Tax Act have also been left untouched.

Legal experts pointed out that Reliance Industries Ltd (RIL) had recently used loopholes in the existing depreciation norms to make provisions for a minimum alternate tax of Rs 48 crore on book profits of Rs 381 crore, although it simultaneously declared a net profit of Rs 1,323 crore.

With many other companies now expected to follow RILs innovative example, the experts argue that there is an urgent need to examine depreciation norms in totality and align the rates under the two Acts wherever possible.

 

Some changes are expected in depreciation norms under the Income Tax Act. However, company law experts say further rationalisation of rates is possible within the Companies Act.

The Companies Act currently permits companies to follow either the straight-line method (SLM) or the written-down value (WDV) method to provide for depreciation. Many experts believe that a single mode of depreciation should be introduced instead of retaining both.

The report of the expert group on the Companies Act had argued that the differing depreciation rates under the two Acts should be retained, since they serve different purposes. The Companies Act creates long-term corporate value for the shareholders for which the assets have to be written off over a number of years while the depreciation rates in the Income Tax Act are designed to provide funds for replenishment and replacement of assets.

The committee had added that ``the incentive aspect of depreciation is particularly important in the Indian context. Depreciation rates under the I-T Act have been designed to encourage core and priority sector industries.

However, the group had accepted the need to rationalise the depreciation rates and slabs in the Companies Act. Accordingly, it had put up a model depreciation table for discussion.

The table proposed to reduce the existing rates and slabs from six columns, running into several pages, to a half-page table with just three rates. The depreciation rates were also rounded off, replacing the existing fractional rates of depreciation. However, the failure of the draft report to elicit extensive public response meant that the model depreciation table too did not attract much attention. As a result, the expert group has opted to retain the existing rates of depreciation.

Since the last review of the depreciation rate took place in 1995, company law experts believe that unless another review is carried out now, the depreciation rates will remain untouched for several years more. ``This would be a good opportunity lost to rationalise the rates in the Companies Act, said a source.

The DCA may prescribe a single minimum rate of depreciation, consisting of just two rates for single and multiple shifts. This would replace the present rates for single, second and third shifts followed under both the SLM and WDV method. But any such change can be implemented only along with the new Companies Bill.