Backdrop
India's general elections of 2014 resulted in a Government having a clear and decisive majority for the first time in 30 years. The new Government with a clear majority seeks to boost Indian manufacturing with a "Make in India" campaign. Manufacturing sector is the backbone of any economy. In this backdrop, one can expect tax incentives in the forthcoming Union Budget for the manufacturing sector.
The tax incentives are more likely to be by way of investment-linked incentives rather than profit-linked incentives. Profit-linked incentives incentivise creative book-keeping to shift profits from taxable business/unit to tax-free business/unit. To overcome this, profit-linked incentives have been sought to be replaced by investment-linked incentives over the years. One is likely to witness tweaking of investment-linked incentives to boost investments in manufacturing sector
Investment Allowance
Investment allowance was introduced for manufacturing companies by the Finance Act, 2013 by inserting section 32AC which allowed investment allowance of 15% for investment of more than 100 crore in plant and machinery during the period from 01.04.2013 to 31.03.2015. To incentivise smaller entrepreneurs, the Finance (No.2) Act, 2014 reduced the investment threshold from Rs.100 crores to Rs.25 crores. New sub-section (1A) has been inserted in section 32AC by the Finance (No.2) Act, 2014 specifying the conditions to be fulfilled for availing benefit under the lower threshold of Rs.25 crores.
This minimum investment threshold limit in plant and machinery is Rs.25 crores. Even this threshold is pretty high and many micro and small enterprises would not be able to avail of the investment allowance incentives under section 32AC. One can expect the threshold limit of investment to be lowered even further to say Rs.5 crores so that micro and small enterprises would be able to avail the benefits under section 32AC
Investment allowance deduction is not an expenditure and is not debited to profit and loss account. Therefore, it does not reduce "book profit" for the purpose of calculation of MAT for companies. The Union Budget 2015 is expected to rectify this anamoly by allowing deduction of investment allowance for calculation of MAT as well
Further, section 32AC applies only to assessees which are companies. One may expect the extension of the investment allowance benefit under section 32AC to non-corporate assessees as well.
Additional Depreciation under section 32(1)(iia)
Section 32(1)(iia) provides additional depreciation at the rate of 20% on new plant and machinery acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power.
This section is similar to Section 32AC of the Income-tax Act in following terms:
(i) Both reliefs are in respect of investment in new plant and machinery.
(ii) Both are one-time benefits, not recurring annual benefits like depreciation under section 32(1)(ii)
(iii) Both are sector-specific
But, there are some differences also which can be described with the help of following table:
| S. No. | Depreciation under section 32(1)(iia) | Investment allowance under section 32AC |
| 1. | Available to all assesses engaged in manufacturing or production or generation or distribution of power | Available to companies engaged in manufacturing or production of any article or thing. |
| 2. | No qualifying minimum investment to avail the benefits | Actual cost of new asset acquired and installed in previous year should be more than Rs. 100 crore/Rs. 25 Crore, as the case may be. |
| 3. | If asset is put to use for less than 180 days in the year of acquisition, then depreciation restricted to 50% of the entitled depreciation | Even if new assets is acquired and installed on last day previous year, full investment allowance provided if other conditions satisfied |
| 4. | Rate is 20% of actual cost | Rate is 15% of actual cost |
So, instead of amending section 32AC to extend it to non-corporate assessees, it is quite possible that the additional depreciation benefit may be tweaked to do away with "restriction of benefit to 50% if asset put to use for less than 180 days" clause for additional depreciation. Additional depreciation may be tweaked to do away with the "put to use" requirement. Indeed if investment has to be incentivised, the "put to use" clause is redundant
Combining additional depreciation and investment allowance for simplicity sake
Isaac Newton is said to have made a big hole in his wall to allow his pet cat to come into his room. The cat gave birth to a kitten. Newton made another small hole for the kitten. Little did it occur to him that the kitten can also pass through the hole meant for the cat. Basic difference between additional depreciation and investment allowance is that the former is linked to putting asset to use and latter is linked merely to investment in asset. To incentivise investments and simplify matters, additional depreciation of 20% may be scrapped and merged in investment allowance and total investment allowance of 35% may be allowed. There is a possibility that this may happen.
Suggestions-Increasing tax-free income-tax slabs for individuals more effective than investment linked incentives for businesses
The primary stimulus for investments in plant and machinery is not investment allowance or additional depreciation. Prime driver of investments is demand which in turn depends on purchasing power of consumers. The best way to put money in the hands of people is to increase the tax-free slabs for individuals to Rs.5 lakhs from Rs.Rs.2.5 lakhs (for those aged below 60)/Rs.3lakhs (for those aged 60 or more but less than 80). There is a good case for doing away with normal, senior citizens and super senior citizens categories and have common exemption threshold and tax slabs for all. The 10% tax slab which is currently Rs.2.5/3 lakhs to Rs.5 lakhs may be revised to Rs.5 lakhs to Rs.6 lakhs and 20% tax slab may be revised to Rs.6 lakhs to Rs.10 Lakh which is presently at Rs.5 Lakh to Rs.10 Lakh
Increasing threshold income-tax exemption limit for Individuals from Rs.2,50,000/Rs. 3,00,000 to Rs.5,00,000 makes sense for the Government . Here is why, the Parliamentary Standing Committee on finance in its 49th report (March 2012) pointed out that:
• Almost 90% of taxpayers comprise of individual taxpayers in the 0-5 lakh income slab without commensurate tax yield; which translates into nearly 3 crore assesees.
• It is absurd that the Department should diffuse their energies and spread their resources thin over handling such a large number of individuals with low income potential.
• The argument that more taxpayers have to be brought within the tax net for widening the tax base can hold water only to the extent that this approach brings in more taxpayers and tax revenue from the higher income brackets, rather than simply adding to the numbers in the lower segments.
• Keeping in view the inflationary trends in the economy and the imperative to leave more disposable incomes in the hands of individual tax payers, particularly those in the lower income bracket, the Committee would recommend that the tax slab attracting „nil rate, that is, full exemption from tax on income should be raised to three lakhs from the proposed two lakhs.
• Higher exemption limit would go a long way in minimising the compliance and transaction costs of the Income Tax Department, which can now focus their attention and re-orient their resources on the higher income groups, untaxed or concealed incomes, and categories and sectors that are avoidance or evasion prone.
• The revenue gap, if any, could be easily bridged by way of stringent measures to curb and bring to book unaccounted money and through realisation of huge tax arrears and by way of savings from the proposed transition to the investment-linked incentive / exemption regime.
Increasing exemption limit will be win-win for Government, taxpayers, businesses and economy in general as under:
♦ incentivise hardwork and enterprise
♦ incentivise more investments since purchasing power of consumers increase and businessmen will want to profit from that; this will generate higher employment
♦ due to higher consumer spends, indirect tax collections will increase
♦ increase voluntary compliance and reduce evasion and avoidance of tax
♦ reduce cost of collection and administrative work for Government
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