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FINANCIAL EXPRESS: Implicationsनिहितार्थ of doing awayदूर कर दें with tax exemptionsछूट
It is important to
anticipateपहले से सोच रखना the
ramificationsअसर of phasing outचरणबद्ध all
tax incentives, before a detailed roadmap is rolled outलुढ़काना.
Most revenue forgone पहले से is
accounted for by sectors such as export-oriented units in IT/ITeS and SEZs, and
in infrastructure sectors like power, bridges, highways, water treatment and
industrial parks.
The I-T Act, at present,
provides for a sunset clause for most, if not all tax incentives, and in the
recent proposal of CBDT, the government, inter alia, proposed a sunset date for
business/activities which at present do not have one—for example, section 10AA
providing tax incentives प्रोत्साहन to units exporting
out of SEZs. There are key implications that can be anticipated.
Revenue collection
Short term: The likely
implications of a rate reduction together with a phaseout of tax incentives are
based on a static analysis over a 4-year period in which the tax rate will be
gradually reduced while the MAT rate remains the same.
* Companies that pay taxes
under normal provisions of the I-T Act: Companies that do not claim major tax
incentives generally pay taxes under normal provisions. The phased reduction in
the base tax rate from 30% to 25% would ordinarily साधारणतया
result in lowering the tax liability for such companies, resulting in greater
profits available for deploymentपरिनियोजन or
distribution as dividends.
* Companies which pay taxes
under MAT provisions: In the case of companies that claim large tax
incentives/exemptions and are consequentlyफलस्वरूप
paying tax under MAT provisions, there may not be any immediate change in their
tax liability as these companies would continue to pay taxes under MAT
provisions, until tax incentives expire or are phased out. During the 4-year
period of reduction in the base corporate tax rate, the decrease in net tax
rate would correspondinglyतदनुसार increase MAT credit
for such companies and, consequently, such companies will have excessive
accumulatedसंचित MAT( Minimum Alternate Tax) credits.
Once tax incentives are
phased out/expire and the eligible company’s tax liability is higher under
normal provisions of the I-T Act, such companies will be able to utilise
accumulated MAT credits to mitigateकम करना
future tax liability.
Medium to long term: At
present, the ETR( Effective Tax Rate) of corporates is roughly around 23%,
being lower than the statutory tax rate. With the move to reduce the corporate
tax rate to about 28% (inclusive of applicable surcharge and cess),
complementedजोड़ना with removal of tax exemptions, it may
result in an increase in revenue collection and, consequently, an increase in
the overall tax burden for the corporate taxpayer.
Considering that tax
according to MAT provisions is generally paid by companies claiming tax exemptions
or concessionsरियायतें, the efficacy of MAT
provisions may need to be re-evaluated in future budgets once tax exemptions
are removed. Our view has been that MAT is a regressiveप्रतिगामी tax
policy move and should be made applicable very selectively and its continuation
when tax exemptions are removed is questionable.
Socio-economic implications
Most tax incentive
provisions in the I-T Act are intended to catalyseउत्प्रेरित
investments in sectors focal to achieving socio-economic growth targets. Eliminating
all extant tax incentives could prove counterproductiveउल्टा, at
least in the short to medium term, hamperingबाधा
growth in sectors and geographies which are affected. So, it is imperativeअनिवार्य
that incentives are categorised in decreasing order of their dispensabilityनगण्य and
a phaseout plan around such order of preference is devisedतैयार.
The government may find it
difficult to do away with locational/geography based incentives, a notable
example being incentives offered as part of bifurcationविभाजन of
Andhra Pradesh. It is possible that the ministry of finance may take a fresh
look at it, despite the stated intentइरादा in
its recent press release.
Incentives for the
manufacturing sector in the form of acceleratedत्वरित
capital write-offख़ारिज करना are
needed to encourage investment, which has been low as a percentage of GDP.
Moreover, accelerated depreciation is a timing issue, not necessarily an
incremental tax advantage. Tinkeringछेड़छाड़
with these basic tenets सिद्धांतों of the tax incentive
regimeशासन may
not yieldप्राप्ति much, and can lead to
disruptiveहानिकारक trends in the sector,
besides going against the grain of the Make-in-India campaign and the stability
of our tax policy.
Tax rate disparityअसमानता
The breakupब्यौरा of
ETR in the Revenue Forgone Statement for FY2013-14 indicates that the ETR of
smaller companies (i.e. companies having PBT(PROFIT BEFORE TAX) up to R10
million) is 26.89% whilst ETR of companies having PBT amounting to R5 billion
or more is 20.68%. The reason for the disparity appears to be two-fold.
* There has been a gradual
phasing out of profit-linked deductions and the levyउगाही of
MAT on companies.
* The maximum advantage of
proposed tax exemption/concession regime is enjoyed by relatively larger
companies.
The proposal to eliminate
the tax concession regime may also help bridge the tax rate disparity. Hence, a
case can be made out to spareअतिरिक्त
small enterprises from the phaseout exercise.
Tax disputesविवादों
A welcome consequenceपरिणाम in
the medium to long term could also be a reduction in disputes regarding tax
incentive claims, which form a substantial part of litigationमुकदमेबाज़ी in
courts.
CBDT recently rolled out
draft proposals for phasing out tax exemptions/incentives; the draft has been
put out for public comments. The key highlights of the proposals are:
* Profit-linked,
investment-linked and area-based deductions will be phased out for both
corporate and non-corporate taxpayers.
* Businesses/activities
having a sunset date {[In public policy, a sunset provision or clause is a
measure within a statute, regulation or other law that provides that the law
shall cease to have effect after a specific date, unless further legislative
action is taken to extend the law.]} will not be modified to advance the sunset
date. In the case of tax incentives with no terminal date, a sunset date of
March 31, 2017, is proposed to be provided either for commencement प्रारंभ of
the activity or for claim of benefit, depending upon the structure of the
relevant provisions of the I-T Act.
* The peak tax depreciation
rate will be reduced from 100% to 60% for existing and new assets from April 1,
2017.
* Weighted deduction
available to in-house expenditure (including certain capital
expenditure)/donation for scientific research will be phased out from April 1,
2017.
* Deductions available in
case of expenditure on/donations to eligible social welfare projects or schemes
will be phased out from April 1, 2017.
There are a few key
takeawaysले जाओ
from the draft proposal.
* The proposed roadmapसड़क नक़्शा in
general is broadly on expected lines, following the announcement in the Budget
2015, and subsequentआगामी interactions with business
and trade bodies.
* Existing sunset milestones
on tax holiday provisions are to be continued, i.e. no rollback and/or
extensions are proposed. All other tax holiday provisions, where no defined
sunset date exists, will have a uniform sunset date of March 31, 2017. For
eligible businesses that begin their tax holiday by the sunset date, the
effective period for which companies will enjoy a tax holiday runs into the
period 2025-30.
* Rollback from April 1,
2017, of the weighted deduction is in keeping with the overall objective of
phasing out incentives, albeitयद्यपि this proposal is a
setback for high technology, and research-intensive businesses such as
biotechnology, pharmaceutical, IT/ITeS, as the proposal will take away the
arbitrageपंचायत presently available for in-house
research and development activities.
* Roadmap for tax rate
reduction has been held back and should be announced once proposals have been
finalised after taking on board stakeholders.
Recommendations
Evidentlyबेशक,
the case for corporate tax rationalisationयुक्तिकरण
through a two-prongedदाँतोंवाला approach—rate
reduction and phasing out tax incentives—becomes more strategic when viewed
from the standpointदृष्टिकोण of enhancingबढ़ाने tax
collections and tax-to-GDP trends, without compromising the trade-offअदला - बदली
which tax incentives facilitate from a socio-economic standpoint.
The draft proposals for
rationalisation and withdrawal of tax incentives have attempted to strike a
balance between the macroeconomic objective and the need to provide certainty
to taxpayers. It is imperativeअनिवार्य
that, in the same vein, the final roadmap for corporate tax rate and tax
incentive rationalisation bear the following features:
* There should be a clear
timeline for rate reduction, to mitigateकम करना any
uncertainty or speculativeकाल्पनिक
trends in successive rate reduction until corporate tax rates are reduced to
the targeted 25%.
* Continue incentivising
capital formation in the economy, by allowing accelerated writeoffख़ारिज करना of
capital investment for industrial and infrastructure activities, i.e.
manufacturing, and development/operation and maintenance of infrastructure
facilities, as it is merely a timing issue, not necessarily an incremental tax
advantage.
* Review provision of MAT
levy under the I-T Act, and its appropriateness/relevance for corporate
taxpayers once tax incentives are phased out in entirety, and the target of
corporate tax rate reduction to 25% is achieved.
* Build a business case for
continuing incentives for SMEs.
* Identify
industries/segments such as IT equipment with export potential and continuously
review such manufacturing goods to promote Make-in-India.
* Projects, particularly SEZ
development, that are on the drawing board should be viewed independently as
they may not be able to meet the notification deadline by March 31, 2017.
* An overall calibrationअंशांकन of
the phaseout of incentives is recommended, given that tax reduction is
calibrated over a four-year period.
* Review the effectiveness
of DDT as it affects overall competitiveness.
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