The Hindu Business Line : `Free depreciation' need of the hour: FICCI

THE proposal to reduce the rate of depreciation for general machinery and plant to 15 per cent from the existing rate of 25 per cent has sent India Inc into a tizzy.

According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the need of the day is to introduce the concept of `free depreciation' where an enterprise may choose the quantum of depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimise productivity.

Since the total depreciation allowed to the enterprise will not exceed the cost of the asset, there would be no revenue loss to the Government.

According to FICCI, the Finance Ministry's sop by way of increasing the existing rate of initial depreciation of 15 per cent to 20 per cent would hardly be enough to neutralise the adverse impact of the reduced depreciation.

FICCI has pointed out that the reduction in depreciation rates, which will increase the pay back period of the capital cost of an asset, is not in step with the dynamism in the economy characterised by rapid technological advancement.

The Indian industry to become globally competitive has to modernise and upgrade continuously its existing plant and machinery.

In this perspective, the reduction in depreciation rates would be an obstacle and detrimental to the business growth.

The chamber has expressed serious concern as estimates show that due to reduction in depreciation rate, the tax liability of a medium sized company in electronic hardware sector would shoot up from the existing Rs 53.42 lakh to Rs 82.80 lakh, an increase of almost 55 per cent in the tax liability.

The plant and machinery, as per the new rate, will depreciate to the extent of 95 per cent in 20 years whereas as per the depreciation rate prior to the Budget, it would be in 12 years.

It has argued that the intention of the Government appears to be to align the depreciation rates under the Companies Act, 1956, and the Income Tax Act, 1961.

It, however, needs to be noted that the different set of depreciation rates under these Acts are designed to serve different objectives. FICCI also stated that in the case of capital-intensive industries, the tax liability would increase despite reduction in corporate tax rates and allowing MAT credit.

The chamber has urged the Government to consider allowing 50 per cent depreciation for investments made till April 1, 2007 in the larger interest of textile industry, which will ultimately lead to higher employment generation, higher GDP contribution, higher exports and make Indian textile industry further competitive in the world arena.

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