If you think corporates have got a bonanza from the Finance Minister’s move to reduce the corporate tax in the Union Budget, it’s far from true. Nearly two-thirds of what P Chidambaram has doled out through corporate tax cut will be wiped out by the changes in the depreciation policy.Data available with the Centre for Monitoring Indian Economy (CMIE) says that 2,697 listed companies will save Rs 7,898 crore by way of the reduction in corporate tax. But listed corporates will have to shell out a whopping Rs 5,253 crore due to the change in depreciation provision.After taking into account the fringe benefit tax (according to Crisil, corporates will have to pay up Rs 4,300 crore as FBT), even the balance Rs 2,645 crore gain will be wiped out.The cut in depreciation rate to 15 per cent from 25 per cent will mean more income would be available for taxing. The initial depreciation on new capacity has been increased to 20 per cent from the earlier 15 per cent. Moreover, the requirement to increase capacity by a minimum 10 per cent to claim initial depreciation has been done away with.‘‘The corporates will not have much impact due to the corporate tax rate cut,’’ says corporate lawyer, Y P Trivedi. ‘‘Low rate of depreciation will increase liabilites of Indian companies. Only the capital goods industry will be happy with this move,’’ he says. While the corporate tax was cut from 35 to 30 per cent, there’s a 10 per cent surcharge on it.The depreciation is provided to take into account the loss in value of the machines, equipment or cars it has purchased. However, unlike other expenses, depreciation expense is a “non-cash” charge. This means that no money is actually paid at the time in which the expense is incurred.“Like all other expenses, depreciation expense reduces the taxable income of the company. Yet, a company reporting a depreciation expense incurs no additional cash expenditure. In other words, a higher depreciation allows companies to reduce their taxable income without making the additional cash expenditure typical of most other expenses,” said a Mumbai-based chartered accountant.As per the CMIE study, listed companies had provided Rs 43,781 crore in the year ended March 2004. As per the new depreciation tax structure, companies have to provide only Rs 26,269 crore. This means an additional Rs 17,512 crore will be available for taxation. A 33 per cent tax on this means an outgo of Rs 5,253 crore through additional tax.“Whereas under the old regime about 90 per cent of the cost of the asset could be claimed as a deduction in 8 years, under the proposed regime it would take about 13 years,” said an analysis by B K Khare, a leading chartered accountant. Take for example, Indian Oil, India’s largest company in terms of sales turnover. IOC which provided Rs 1,873 crore for depreciation in 2004 will have to shell out only Rs 1,124 crore under the new dispensation. This leaves Rs 749 crore to be taxed.Similarly, Reliance Industries, the largest private sector company, provided Rs 3,247 crore for depreciation. But the company would have to provide Rs 1,948 crore only as per the new depreciation rate, leaving Rs 1,299 crore more to be taxed.In short, depreciation is no longer an attraction for corporates to reduce taxable income. On the other hand, the fall in depreciation rates will reduce the cash earnings per share of companies.
