The Hindu Business Line : Infrastructure speculation?

Why should a regime akin to the one set out for speculative loss be prescribed for two industries that are of seminal importance for infrastructure development?

S. Murlidharan

The Explanatory Memorandum to the Finance (No. 2) Bill, 2009 waxes eloquent about the need for investment-based tax incentives rather than giving incentives based on profits, which is the case as of now. The Bill, therefore, chooses two industries — cold chains and warehousing for agricultural products and pipelines carrying oil and gas belonging to others at least to the extent of one-third of their capacity in their capacity as common carriers — for a specia l treatment of conferring 100 per cent deduction vide a new dispensation contained in Section 35AD on any capital expenditure incurred by them other than on acquiring land and goodwill.

Though not said in so many words, these two industries have presumably been chosen on a pilot basis and one could see more and more industries becoming eligible for this special treatment.

Capital expenditure

These two industries then do not have to add their capital expenditure to the relevant block of asset and wait patiently for depreciation year after year. Instead, the entire capital expenditure would be treated as the expenditure of the year in which they have been incurred.

To wit, if a company in the specified business has got a profit of Rs 10,000 crore and it has forayed in a big way into the specified business by spending Rs 8,000 crore by way of capital expenditure, its taxable income would be only Rs 2,000 crore.

The UK has experimented with success such schemes. One would imagine that 100 per cent depreciation in the very first year is what the doctor has ordered — it would spur investment with its multiple spin-offs.

Ominous portents

But those who have started exulting over this development would have dropped jaws soon enough.

For, a new Section 73A is simultaneously proposed to be created in terms of which any loss suffered by the specified business would have to be sequestered, so to speak, in the manner of a speculative loss and set off only against profits from specified business of the same year or at any time in the future. The portents are ominous for these two industries.

First, the distinction between unabsorbed depreciation and other losses maintained for others with huge advantage does not enure for them.

Remember, unabsorbed depreciation in terms of Section 32(2) enjoys a special status — it can be carried forward infinitely and set off against any income at all of the assessee whereas other losses can be carried forward only for eight years for set off only against income from business or profession.

Therefore, for the specified businesses, the carry forward and set off mechanism is the one set out in Section 73A which while allowing infinite carry forward facility, says that losses from the specified businesses can be set off only against income from a specified business.

Which means a company that is operating in both the fields —specified as well as non-specified — will have the mortification of paying tax on its income from the latter despite the huge loss from the former and will have to cool its heels till such time the former makes profits.

In other words, the example given in an earlier paragraph — Rs 10,000 crore pre-depreciation profit minus Rs 8,000 crore of deduction under Section 35AD — giving rise to a substantially less taxable income is more an illusion than a reality until such time at least the Government expands the list of specified businesses.

One wonders why a regime akin to the one set out for a speculative loss has been prescribed for the two industries which are of seminal importance for infrastructure development of the country.

Second, the limitless carry forward facility is nothing to write home about given the fact that investments in the specified businesses by their very nature would be huge and the resultant loss would take aeons to be absorbed by future profits.

The Bill then is guilty of giving 100 per cent deduction for capital expenditure grudgingly — if the Government is guilty of giving liberal pay hikes and simultaneously wrenching away a substantial part of it through iniquitous tax policies, the same can be said about its thinking on 100 per cent deduction for capital expenditure as well.

At first flush, it appears to be a substantial benefit but the fine print is contained in Section 73A that consigns the benefit given by Section 35AD to the doghouse.

(The author is a Delhi-based chartered accountant.)

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