Different rates of depreciation under companies act and income tax act- A hassle need to be removed – A suggestion
Introduction: –
Depreciation on assets e.g., building, machinery, furniture and vehicle is claimed as expenses in accounts of every business entity as all these assets depreciate on daily basis due to various factors.
Depreciation of a particular asset should be calculated on the basis of useful life of an asset. However, Companies Act, 2013 and Income Tax Act, 1961 have different rates of depreciation and different methods e.g., straight line method and WDV method. So, a company have different amounts of depreciation as per Companies Act and as per Income Tax Act. Further the company have to calculate Deferred tax assets / liability as per AS 22 to give a true and fair view of financial statements.
Depreciation under Companies Act, 2013 is calculated on the basis of useful life of assets, while rate of depreciation as per Income Tax Act, 1961 are normally higher, it may be intentionally on part of the law makers to incentivize businesses.
Our suggestions: –
1. Rates of depreciation under both the laws should be brought to same to avoid complications in the tax calculations and calculation of profit/ loss on sale of assets etc.
2. In lieu of incentive of higher depreciation to businesses, income tax rate may be brought down by 2 % in case of companies and 3% in case firms and individuals. However, manufacturing companies opting for tax rate u/s 115 BAB may continue be taxed @ 15% as it is already reasonably low.
3. Since, WDV as per Companies Act, 2013 would be more than under Income Tax Act, 1961, no depreciation should be allowed under Income Tax act, 1961 till WDV of both the acts come at same amount. However, for the sake of simplification total WDV of each act may be taken instead of each block of assets.
4. In following years depreciation as per books of accounts may be allowed under income taxes, so no adjustments in ITR will be required, no deferred tax liability needs to be calculated. The amount of Deferred Tax liability be recalculated every year till both WDV reaches same amount, which will also become zero in that year.
5. In most cases, it will take 3-5 years to reach both WDV at par, after which it will be hassle free ITR.
Ease of doing business: –
This benefit will prove to be a great aid in achieving ease of doing business as: –
1. MAT calculations and workings can be avoided since the rate of depreciations under both the acts will become the same.
2. The business organisation will be freed from the responsibility and compliances of calculating different depreciation amount under different acts.
Benefits to revenue: –
1. On one hand it will be a step towards ease of doing business and on other hand reducing income tax rates will enhance image of our tax system in business community in India and abroad.
2. Moreover, in case of sale of depreciable assets sale price is reduced from WDV of block of assets, so revenue do not get the tax on sale of same, if the above proposal is accepted, exchequer will get its due share on every sale of assets.
Implementation: –
Initially the above proposal may be made applicable to only companies, which are subject to different depreciation rates. However, the scope of this benefit can be extended to different forms of businesses later on.
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