The 15 per cent tax deduction proposed in the latest >Union Budget to companies, on the value of their investments in excess of Rs 100 crore in plant and machinery couldn’t have come at a better time. Official GDP estimates for April-December, released only last week, show a tepid 5 per cent growth over the corresponding three quarters of 2011-12. But even worse is the annual growth of 0.09 per cent in gross fixed capital formation, capturing the sheer extent of a drying-up of investments in the economy. The Government has been under some pressure to demonstrate in some tangible way that it is serious about driving growth by reviving investments. In the circumstances, a 15 per cent ‘investment allowance’ would induce companies, at least those with capacity expansion plans, to go ahead and achieve maximum possible project progress within the next 24 months – the time window within which the proposed tax concession is available. And the fact that it has chosen this route – rather than the alternative of merely allowing companies to write off, for tax purposes, depreciation at an accelerated rate – shows an even greater seriousness of purpose.

But that is all the more reason why the Finance Minister, P. Chidambaram, should be seeking to make the deduction allowance more effective and less rigid in the current investment-starved environment. For example, why limit it only to those installing plant and machinery worth more than Rs 100 crore? The Finance Ministry’s data, as it is, shows the effective tax incidence for large companies to be lower than the average level, since they are in a better position to avail of the already existing depreciation and other tax concessions/allowances. A minimum investment requirement of Rs 100 crore, that too only in plant and machinery, will exclude many medium and small entrepreneurs to derive benefits from the 15 per cent tax deduction, while further reducing the effective tax burden for larger corporates.

The same goes for restricting the investment allowance only to those “in the business of manufacture of an article or thing”, thereby leaving out the services sector. If the basic idea is to kick-start a stalled investment engine, how does it matter whether this originates from manufacturing or services, and whether by large or small companies? As long as the investment is happening in plant and machinery leading to increased capacity, be it for production of goods or delivery of services, it should make the least difference in the present context. What the Government must make clear is that the allowance is time-barred: The relevant provisions in the Finance Bill anyway make it applicable only on investments made between April 2013 and March 2015. And as long as these are in hard plant and machinery assets – as opposed to office appliances, computers, furniture or vehicles – it should not be too bothered about the size or sectors where the investments are being made.

comment COMMENT NOW