Finance minister Arun Jaitley discussed with Finance Ministry officials a road map for phasing out the corporate tax exemptions. The objective was to compensate for reducing the corporate tax rate to 25% over the next four years from 30% at present as promised in his budget speech.
The move will hurt companies benefiting from these exemptions in pharma, IT, and infrastructure sector. Of particular concern is possible withdrawal of incentives provided to companies undertaking R&D in India. Companies at present get a 200% deduction on the expenditure incurred on R&D. They will now be able to deduct only the actual expenditure incurred with effect from 2017-18 financial year.
The pharmaceutical industry benefits from exemptions available for R&D. Information technology companies benefit from the investment depreciation allowance available under Section 10A. Infrastructure companies also get some tax benefits under specific clauses. Sectors like heavy engineering, where large capital investments are made may also get impacted.
In a statement, the tax department said the exemptions are being phased out on the basis of four major principles. Profit-linked, investment-linked and area-based tax deductions will be phased out for both corporate and non-corporate tax payers. So the investment subsidy available to manufacturing enterprises may also be withdrawn from F Y 2017-18.
Commenting on the proposed move, a functionary from FISME, the leading federation of micro, small and medium enterprise commented that the move to withdraw investment allowance and weighted allowance on R&D expenditure will be a retrograde step. To promote employment creation through Make in India Government should allow set off in income tax for all new investment irrespective of any floor or ceiling and continue the weighted subsidy on R&D expenditure, he opined.
Government will also not allow the so-called sunset date to be advanced. This means that while existing tax exemptions will run their course, the government will not extend these exemptions further.
“In case of tax incentives with no terminal date, a sunset date of 31 March 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 government said.