Government of India has unveiled the route-map of an ambitious reform plan to rid of its income tax law of exemptions and lower the corporate tax rate to 25% from 30%, and thus bringing it closer to international levels. Tax holidays, for special economic zones and units in such areas, infrastructure facilities and commercial production of natural gas and mineral oil having no end date for commencement of operations.

“The provisions having a sunset date will not be modified to advance the sunset date. Similarly, the sunset dates provided in the Act will not be extended. In case of tax incentives with no terminal date, a sunset date of March 31, 2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the (Income Tax) Act,” the CBDT has proposed.

The plan, has been promised by Finance Minister Arun Jaitley in his budget speech, aimed to declutter the income tax law that has been laden with tax exemptions leading to a rise in abuse and tax disputes. In his budget speech, Jaitley had said: "A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion."

"This plan has been designed to prevent any abrupt loss to any business," a finance ministry official said. “The highest rate of depreciation under the Income-tax Act is proposed to be reduced to 60 per cent (from April 1, 2017). The new rate is proposed to be made applicable to all the assets (whether old or new) falling in the relevant block of assets,” CBDT proposal said.

"The only worrying element is the future of SEZs. SEZs had ceased to be popular since MAT (minimum alternative tax) had been imposed on them, but with this (phasing of tax holidays) announcement, it can be expected that there would be no further investments in SEZs," she said.

"As promised, it clearly lays down that the base tax rate for companies would be reduced from 30% to 25%. This will immediately bring down the effective tax cost for companies and is bound to increase investment activity in the country," said Neeru Ahuja, partner at Deloitte Haskins & Sells LLP.

"Apparently, the proposal seems to be quite fair, especially where it states that the tax exemption provisions having a sunset date will not be modified to advance sunset dates," said Sanjay Sanghvi, partner at law firm Khaitan & Co.

Ketan Dalal, senior tax partner PwC India, said the issue of sunset deadline needed more clarity, "in the sense that where the relevant activity or project commences on or before March 31, 2017, the incomes beyond that from such activity or project should continue to be exempt for the period envisaged in the exemption, since commercial decisions have been initiated on that basis".

By Premji