Restricting the reduction in corporate tax rate to small companies, finance minister Arun Jaitley kickstarted the phaseout of exemptions to corporate taxpayers. In his Budget speech for 2016-17, Jaitley announced phaseout of exemptions such as accelerated depreciation and benefits to Special Economic Zones (SEZs).
The reduction in corporate tax rate has to be calibrated, Jaitley said, adding that the benefits from phasing out of exemptions are available to government only gradually. The finance minister announced lower corporate tax of 25 per cent plus surcharge and cess for new manufacturing companies which are incorporated on or after 1st March, 2016 provided they do not claim other exemptions. He also lowered the corporate income tax rate to 29 per cent plus surcharge and cess for companies with turnover not exceeding Rs 5 crore.
In last year’s Budget, Jaitley had announced reduction in corporate tax rate to 25 per cent over four years from 30 per cent at present along with simultaneous withdrawal of exemptions. In November, the Finance Ministry had unveiled a draft roadmap which had proposed that profit-linked, investment-linked and area-based deductions will be phased out for both corporate and non-corporate taxpayers.
Jaitley said the accelerated depreciation provided under IT Act will be limited to maximum 40 per cent from April 1, 2017 and that the benefit of deductions for research would be limited to 150 per cent from April 1, 2017 and 100 per cent from April 1, 2020.
The Budget for 2016-17 has also proposed that the benefit of section 10AA to new SEZ units will be available to those units which commence activity before March 31, 2020, while the weighted deduction under section 35CCD for skill development will continue up to April 1, 2020. The FM also proposed to amend section 80IA of the Income-tax Act so as to provide that no deduction shall be available to enterprise which starts development, operation and maintenance of any infrastructure facility on or after 1st April, 2017.
He further proposed to provide that the development, operation and maintenance of an infrastructure facility beginning on or after 1st April, 2017 shall be eligible for investment linked deduction under section 35AD of the Income-tax Act.
“In line with the declared policy of withdrawal of incentives and reduction in tax rates, the budget contains provisions for a sunset date for specified incentives. These include, for example, special economic zones, infrastructure facilities, R&D expenditure, etc,” Sunil Shah, Partner, Deloitte Haskins & Sells LLP, said.