Budget 2017: Extend 15% deduction for acquiring new machinery beyond Mar 31

Vishal J Shah 

The manufacturing sector is currently witnessing a slowdown on account of demonetisation and uncertainty in global market which has adversely impacted consumption cycle, exports and capital investment. With strategic global advantages, the sector expects constructive measures to restore the confidence of the stakeholders. Investments in Skill India campaign, digital innovation, research & development, the continued emphasis on ease of doing business and focussing on business-friendly tax sops will go a long way to provide stimulus to the sector which, in turn, will positively impact the GDP.

Last year’s Budget introduced a noteworthy tax reform to boost investments in manufacturing start-ups by offering them reduced corporate tax rate of 25 percent. As the government plans to phase out existing exemptions gradually, reduced corporate tax rate benefit should be rationalised to all corporates engaged in manufacturing.

With the aggregate Minimum Alternate Tax (‘MAT’) rate of almost 20 percent, the tax benefit given to eligible taxpayers is virtually neutralized, as the difference between the effective corporate rate tax and MAT is very marginal. This is in addition to cash flow impact which the company suffers due to levy of MAT. With the government aiming to phase out tax exemptions, it is imperative to address the impact by reduction/withdrawal of MAT in a calibrated manner. However, clarity for carry forward of MAT credit should be provided.

The growth in the sector can be facilitated by encouraging new Special Economic Zones (‘SEZ’) which is losing its impetus considering negligible tax advantages due to phase out of exemptions, applicability of MAT and DDT. Withdrawal of MAT and DDT for SEZ developers and their units shall have a positive impact and encourage capital inflow in SEZ.

To boost capital investment in manufacturing sector in future, it is expected that the existing benefit for additional deduction of 15 percent in respect of acquisition and installation of new plant and machinery to be extended for investments beyond March 31, 2017. The industry also expects that the current threshold of minimum investment be reduced from Rs 25 crore to Rs 5 crore to incentivise SMEs.

With the first phase of adoption of accounts under Ind AS already completed for eligible companies, it is imperative that there is much needed guidance issued by CBDT or government on significant tax issues arising on implementation of Ind AS to provide certainty and avoid long drawn litigation.

It is expected that substantive provisions like GAAR which is effective from April 1, 2017 be made applicable only after there is enough clarity on the process and implementation to avoid litigation and instill confidence of foreign investors.

From an indirect tax perspective, one of the significant move towards seamless transition towards GST is the rationalization of the credit structure. Traditionally, the credit base in India has been restrictive leading to significant blockages. However, the credit provisions under GST are liberal. Hence, one of the crucial step for the Government will undoubtedly be the realignment of current credit structure with GST.

The Government could also consider adopting measures to address the issue of inverted duty structure. Under GST regime, it is expected that the issue of credit accumulation on account of inverted duty structure would not arise, and in case if it does, then the manufacturer will be entitled for refund of accumulated credit.

Other vital area to be addressed is the issue of MRP based valuation with respect to goods. The continuation of MRP based valuation will not have relevance as under the GST regime the tax will be levied at each leg of value addition.

It is now left to the Finance Minister to see if he addresses all or some of the above expectations in the Union Budget 2017.(Author is Vishal J Shah Partner–Tax & Regulatory, PwC)