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SEZs Set to Lose Tax Incentives in Rationalisation

Slew of other sops may also go as govt prepares to lower corp tax rate to 25%

The government will soon forge ahead with plans to cut through the clutter of exemptions that litter the corporate tax code. Tax breaks for special economic zones and units, investment allowances, employment generation, plantation, packaging, highways and accelerated depreciation are some of the incentives that could get end dates as part of the cleanup drive as the rate of tax on companies is lowered to 25% over the next four years.

The introduction of a firm sunset date in open-ended exemptions that do not have this option would ensure there is no disruption from the phasing out of these benefits running into thousands of crores of rupees.

The finance ministry is working on proposals for amendments that will set an expiry date on benefits along with a grandfathering provision for existing beneficiaries to ensure a smooth transition. That means old rules will apply to existing projects and not new ones. The proposals will soon be made public in order to get feedback from stakeholders.Finance Minister Arun Jaitley had reiterated the government's resolve to proceed with the Budget proposal in New York on Tuesday. “There have been some internal discussions,“ said an official. “We would ensure that no abrupt disruption is caused with this exercise.“ While the call on such a step will be taken at the highest political level, discussions have centred on introducing end dates in tax breaks that don't have one, the official said.

For example, exemption schemes that apply to special economic zones and units located in them don't have a prescribed end date. It's the same for many other incentives. Tax exemptions already having a sunset date will not be taken up for renewal, according to the initial discussions.


In his February Budget speech, Jaitley had announced that the government would cut the corporate tax rate to 25% while phasing out incentives.

“A regime of exemptions has led to pressure groups, litiga tion and loss of revenue,“ the finance minister had said. “It also gives room for avoidable discretion. I, therefore, propose to reduce the rate of corporate tax from 30% to 25% over the next four years.“

Even though the basic rate of corporate tax is 30%, the effective one is much lower at 23% because of incentives.Globally, corporate tax rates are much higher than those for personal income tax. In India, the income-tax rate is as high as 30%.“We lose out on both counts, i.e., we are considered as having a high corporate tax regime but we do not get that tax due to excessive exemptions,“ Jaitley had said. In FY15, the government is estimated to have had to forego `. 62,400 crore in corporate taxes on account of various incentives, up from ` . 57,800 crore a year ago. Accelerated depreciation, an incentive given to companies to encourage them to invest more, alone added up to a tax loss of ` .37,000 crore. Benefits to units exporting from special economic zones, or SEZs, added up to another ` . 18,400 crore.


Experts endorsed the government's plan, saying this will clean up the tax system.“The phasing-out of corporate tax exemptions will cer tainly reduce litigation,“ said Suresh Surana, founder, RSM Astute Consulting Group.

But he also called for the abolition of minimum alternate tax (MAT) and a reduction in dividend distribution tax.MAT is levied on companies that make book profits but do not pay tax because of various exemptions and incentives. Experts said companies should be given enough time to prepare.

“Phasing out tax exemption with adequate notice is a rational proposition as taxpayers will be able to factor tax costs into their long-term business projections,“ said Pranay Bhatia, partner, BDO India LLP. “However, it is important to evaluate the fundamental reasons why these exemptions were introduced and whether they have achieved the objective with which they were introduced.“

The move to phase out exemptions is also in line with global thinking that seeks to put an end to tax practices that erode the tax base.

The OECD on Thursday presented to G20 finance ministers the Base Erosion and Profit Shifting (BEPS) project containing tax policy standards aimed at putting an end to avoidance and the exploiting of loopholes so companies pay their fair share of taxes.

Economic Times, New Delhi, 10th Oct. 2015

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