The Shoe Is Pinching

Prime Minister Narendra Modi was merely stating the obvious. At a recent function in Delhi, he expressed his discomfort over the practice of giving away Rs 62,000 crore annually as tax incentives to corporate India. His government's stand on such forgone revenue was well known much before this observation.

The difficulty in continuing with several tax incentives - 32 of them contributed to a revenue loss of Rs 62,398 crore in the previous financial year - was highlighted by Finance Minister Arun Jaitley during his budget speech last year. Jaitley had expressed a desire to phase out these tax incentives while simultaneously lowering the effective rate of corporate taxes from 30 per cent to 25 per cent over a period of four years.

Though Modi has just reiterated the government's resolve, the timing of the statement - days before Union Budget 2016/17 - is indicative of the speed with which the government would perhaps like to implement its plans.

Experts say that the government should be cautious in phasing out these exemptions as the revenue losses arising from many of these incentives are not significant. For instance, of the 32 incentives listed by the ministry, the top 11 account for 95 per cent of the total revenue forgone. The top three - accelerated depreciation (Rs 37,010 crore), exemption to SEZs (Rs 18,394 crore) and concessions to power generation, transmission and distribution firms (Rs 10,607 crore) - alone contribute 67 per cent. Targeted exemption withdrawal from the top three segments itself can thus make a big difference even if the 29 other categories are left untouched for the moment, they point out.

Another issue is the possible impact of exemption phase outs on minimum alternate tax (MAT). Ganesh Raj, Partner, Tax and Regulatory Services, EY, says that the withdrawal of exemptions can turn MAT redundant as it is being paid by companies that claim large tax incentives and exemptions.

The road map proposed by the finance ministry in November 2015 had suggested that the phase-out should begin in 2017/18.

Depreciation is the highest component of revenue forgone. The finance ministry wants the highest rate of depreciation under the Income Tax Act to be brought down from the current 100 per cent to 60 per cent. It also proposes that all profit-linked, investment-linked and area-based deductions to be phased out for both corporate and non-corporate tax payers. It wants that exemptions having a sunset date should not be extended. In the case of tax incentives with no terminal date, March 31, 2017, has been proposed as the sunset date.

The future of phase-wise reduction of effective tax rate, and that of MAT will depend on the implementation of these proposals. While some of the suggestions have already been opposed by the industry, the forthcoming Budget will provide more clarity on the proposals that will stay.

It is a known fact that the exemptions have to go, but clarity is needed on when and how it will happen.