The Hindu Business Line : A case for alignment

The rates of depreciation prescribed both under the Companies Act and the Income-tax Act 1961 have no relevance to its useful life and replacement of the asset takes place irrespective of the quantum of depreciation charged in the accounts or claimed for tax purposes.

The advent of block depreciation in 1988 was supposed to simplify the claim for depreciation under the Act, but in the last two decades it has undergone so many changes that it has become more complicated than the position prior to 1988.

The Finance Bill, 2005 has further tinkered with the depreciation rates.

Amidst the din over the fringe benefit tax and banking cash transaction tax, the changes in depreciation rates have largely gone unnoticed.

The changes

The broad change relates to reduction in the rate of depreciation of general plant and machinery from 25 to 15 per cent.

Modernisation and expansion in today's context is associated with acquisition of assets, particularly plant and machinery, and depreciation as a fiscal incentive was one of the several factors taken into account in planning the modernisation schemes.

This could take a hit on account of a 10 per cent drop in the general rate of depreciation effective from assessment year 2006-07. The compensatory factor, as explained by the Finance Minister, is that the initial depreciation rate has been hiked from 15 to 20 per cent.

This is applicable only in the year in which the new plant and machinery is acquired and installed by an assessee engaged in the business of manufacture/production.

There are several other conditions to claim the initial depreciation. The overall benefit or otherwise of the changes in the deprecation rates would largely depend on the extent of acquisition of new plant and machinery post April 1, 2005.

Alongside these changes, the rates of several other categories of assets have been revised downwards.

There is talk of a new Income-tax Act being drawn up and put in place by December 2005. This is a welcome step and long overdue. In framing this law, the time has come to completely overhaul and simplify the law and the rules associated with depreciation, particularly Section 32 and Rule 5.

There is already a demand to align depreciation as charged in the books and allowed for tax purposes. This could be the ultimate process of simplification relating to depreciation.

No doubt corporates would like to retain higher rates of depreciation under the I-T law to facilitate modernisation and expansion. But then one needs to strike a balance between simplicity and a higher dosage of tax.

The solution lies in moderating the rates of corporate tax, mitigating the effect of fringe benefit tax and aligning the depreciation rates so that the cost of compliance and cost of dealing with assessments are kept at a minimum.

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

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