The Hindu Business Line : Corporate income-tax — A mix of lower tax shelters & rates

Any reform would have to address all three elements. The international best practice is to provide for depreciation at rates that would enable the investor to replace the asset before its economic life ends.

In India, in addition to the depreciation rate we have allowed an initial depreciation in order to encourage new investment.

Hon'ble members may recall that, last July, I reduced the condition relating to increase in installed capacity from 25 per cent to 10 per cent.

I am also obliged to keep in mind that a number of profit-making companies continue to pay low tax, even if well within the law, by taking advantage of liberal depreciation rates and of exemptions and incentives. Moreover, the current depreciation rates lean towards employing capital rather than labour.

There is also a demand that corporate tax rates should be aligned with the highest marginal personal income tax rate.

New tax rates: After careful consideration of the pros and cons, the interest of the revenue and the need to give the corporate sector a measure of relief, I propose the following tax structure.

For domestic companies, the corporate income tax rate will be 30 per cent.

There will also be a surcharge of 10 per cent. The rate of depreciation will be 15 per cent for general machinery and plant, but the initial depreciation rate will be increased to 20 per cent.

The corporate sector will find that the proposed tax structure is fair, gives them relief of nearly 3 per cent in the tax rate, encourages new investment and ensures equity among all sections of corporate tax payers. As a further measure of relief:

I propose to remove the requirement of 10 per cent increase in installed capacity for availing of the benefit of initial depreciation.

I propose to reduce the withholding tax on technical services from 20 per cent to 10 per cent.

I also propose that credit will be allowed for the Minimum Alternative Tax paid under Section 115 JB of the Income Tax Act.

I do not propose to make any changes in the tax regime applicable to foreign companies.

Farther-exemption dates: Last July, I had indicated that I would review the terminal dates on exemptions given for specific purposes. Accordingly, I propose to extend the terminal date, in the following three cases, from March 31, 2005 to March 31, 2007:

Weighted deduction of 150 per cent of expenditure on in-house research and development facilities of companies engaged in the business of biotechnology, pharmaceuticals, electronics, telecommunication, chemicals or any other notified product;

Deduction of profits of new industrial undertakings in Jammu and Kashmir;

100 per cent deduction of profits of companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research.

In deference to the request from Air India and Indian Airlines, I propose to extend up to September 30, 2005 the exemption from tax on agreements to acquire aircraft or aircraft engines on lease.

Power replaces mobiles: I propose to amend the one-in-six criteria for filing income-tax returns. Mobile telephone will be removed. Instead, payment for electricity of more than Rs 50,000 per year will be included as a criterion for filing a return of income.

Administrative reforms: Many administrative reforms are underway in the Department of Revenue. Among them are the tax information network and the on-line tax accounting system. As a measure of facilitation, I propose to follow international practice and establish large taxpayer units. To begin with, these units will be set up in major cities. I would like to invite large tax-payers, whether of corporate tax or income tax or excise duties or service tax, to participate in the programme and avail of the single window service. For small taxpayers, I propose to set up help centres in cooperation with industry associations, professional bodies and NGOs.

I have received many suggestions on amendments to the direct tax laws and the indirect tax laws. I have decided to accept some suggestions that require to be acted upon immediately, but I do not propose to burden the Finance Bill with those changes. Instead, I intend to introduce a separate Bill for that purpose during this session. In due course, I intend to place before Parliament a revised and simplified Income Tax Bill.

Revenue gains: My tax proposals on direct taxes are expected to yield a gain of Rs 6,000 crore. On the indirect taxes side, they are broadly revenue neutral.

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