The Hindu Business Line : Tilting at the windmills

Income-tax sleuths are gunning for a renowned manufacturer of wind-energy-generation machinery not so much to nail it for tax evasion as to ferret out information about its clients.

These worthies are alleged to have evaded tax by ostensibly doubling in as power generators by setting up wind-energy farms what with the income-tax law showering a huge tax benefit of 80 per cent depreciation — till the financial year 2004-2005 it was 100 per cent — while calculating income from business and profession.

The Department suspects that these equipment were purchased post-haste almost towards the fag end of the financial year as a knee-jerk reaction to ward off huge tax liabilities that stared them in their face. It has not occurred to the Department that depreciation is a tax benefit whose impact may be accelerated but not stretched. In other words, what is available is the amortisation of the entire cost spanning a period of time, which may be short or agonisingly long.

LAW TO BLAME?

A 100-per cent depreciation, for example, gives instant gratification; but a businessman will have to make fresh investments year after year to sustain its benefit. Is the law to blame for revenue leakage through subterfuges?

Despite restriction of depreciation to 50 per cent of the normal entitlement in cases where the depreciable asset in its year of acquisition was used for less than 180 days, people swing into action at the eleventh hour — after all, even a 40 per cent depreciation in the case in hand is nothing to be scoffed at. Allowance of depreciation in proportion to days of actual use would be the ideal solution but there is the nitpicking from both sides.

The Prime Minister, Dr Manmohan Singh, abolished in the early-1990s, when he was the Finance Minister, a tax provision that entitled one to claim 100 per cent depreciation on small items of plant and machinery costing not more than Rs 5,000. What galvanised him into action was the temerity of a businessman who bought a plant costing crores of rupees but obtained it in a knocked-down condition so that each item did not cost more than Rs 5,000.

It is another matter that similar loopholes in the other areas amenable to splitting and splintering with a view to ducking stiff provisions, notably the one under Section 40A(3) which disallows 20 per cent of cash expenditure in excess of Rs 20,000, have not been plugged. The point is, when the law is slack, there would be people working overtime to take advantage of it. The remedy then lies in tightening the law rather than complaining of tax evasion.

The Government showed remarkable foresight while conferring tax-holiday for house builders, by insisting on the project being constructed on a plot of minimum one acre; otherwise every Tom, Dick and Harry would have jumped onto the building bandwagon. There is no reason why a similar provision cannot be inserted in the context of power generation — a minimum investment of Rs 100 crore upfront, for instance. Power transmission companies too should be mandated to carry power only of those producers fulfilling the minimum investment norm. This twin measure would ensure that power generation is not reduced to a farce. In fact, it is the responsibility of the lawmakers to ensure that the proposed law does not lend itself to abuse and does not become a joke.

(The author is a Delhi-based chartered accountant.)

S. Murlidharan

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