Following the roadmap given by the Central Board of Direct Taxes (CBDT) in November, the Finance Minister has removed some tax exemptions. Accelerated depreciation will be available only for up to 40 per cent from April 1, 2017.

Cold chain facilities and warehouses that were enjoying an investment-linked deduction of 150 per cent can avail only 100 per cent deduction from 1 April 2017.

For scientific research, the deduction available will be reduced to 150 per cent in 2017-18, and 100 per cent in 2020-21. SEZs, infrastructure facilities and oil (mineral) and natural gas companies that commence business on or after that date 1 April 2017, will not get any deduction.

However, the sunset date for commencement of operations of a unit in a SEZ has been pushed to March 31, 2020, against the expected March 31, 2017.

Tax option Further, all new manufacturing companies incorporated after March 1, 2016 will be given an option to be taxed at 25 per cent (plus surcharge and tax) provided they do not claim for any tax exemptions (either profit-linked or tax-linked or related to investment allowance or accelerated depreciation).

Also, the tax for companies that make profit of not more than ₹5 crore (for financial year ending March 2015) has been reduced to 29 per cent tax (plus surcharge and cess).

All tax exemptions under the Income Tax Act were originally introduced with a purpose.

Why the move? For instance, the deduction available for R&D investments was intended to build the research capacity of domestic industries.

The area-linked tax exemption available to manufacturing units set up in North and North-Eastern States was intended to generate employment, thereby developing the regions.

Benefits under section 10AA for SEZs were intended to encourage capital investments from domestic and foreign investors, develop the country’s infrastructure and boost exports.

But, given that over years the number of tax incentives has increased and effective tax rate has come under 25 per cent, it is only logical for the Centre to look at measures to rationalise the tax structure.

The revenue foregone statement shows that companies that make the least profits are the ones facing the highest tax burden. Companies that made more than ₹500 crore of profits paid a tax of effectively only 22.88 per cent, but those that made less than ₹1 crore coughed up 29.37 per cent as tax.

Also, given that corporate tax rates globally have been coming down, it makes sense for India to also follow suit.

Likely impact There will be no immediate impact of the proposed changes. There is still one more year for SEZs and infrastructure facilities to avail of the benefits. If they commence operations before April 1, 2017, they can still enjoy tax deductions.

Companies making profits of less than ₹5 crore (in 2014-15) will, however, see relief. Their effective tax rate will come down to 31.96 per cent from 33.06 per cent.

Also, the new manufacturing companies that opt to not claim any exemption may see good benefit, as the tax rate for them is 25 per cent plus surcharge. Their effective tax rate, if profits are above ₹10 crore, will come down to 28.84 per cent from 34.60 per cent.

Drop in outgo The impact of some exemptions expiring will be seen only from 2017-18. Companies that see a low tax burden now — that includes power manufacturers (14.7 per cent), steel (12 per cent), cement (9 per cent) and sugar (6.95 per cent) — may feel the pinch.

On the other hand, as corporate taxes start to move down, companies coughing up high taxes such as those from education sector, television channels and speciality hospitals may see their tax outgoes drop.

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