The Finance Minister while introducing the Finance Bill, 2015, proposed to reduce the rate of corporate tax from 30 per cent to 25 per cent over the next 4 years. It was also stated that the process of reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax dispute.
Further, the Finance Act, 2016 has initiated the process of phasing out of various deductions and has also reduced the rate of tax in case of a domestic company to 29 percent in case where the total turnover or gross receipts in the previous year 2014-15 is less than INR 5 crores. The reduction of corporate tax of one percent is directly corelated to the company satisfying the threshold relating to turnover/ gross receipts and does not seem related vis-à-vis the phase out process of deductions initiated Similar phasing out has been done by the Finance Act, 2017.
The process of phasing out of exemptions and deductions should not be done across sectors. There are various sectors where the turnaround time for the companies to reach a break even and start earning profits takes longer than some other industries. Some of the sectors would take long for the completion of projects eg deduction under Section 80-IA(4) of the Act dealing with development, operation and maintenance of an infrastructure facility, deduction under Section 80-IAB of the Act dealing with development of special economic zone, deduction under Section 80-IB(9) of the Act dealing with production of mineral oil and natural gas, etc. The government and health care sectors as well have long gestation periods. There would be certain entities which would have recently commenced commercial operations, will have to tackle phasing out much faster than anticipated and planned. Thus, the phase out of deductions and exemptions should be applicable to select industries and based on long-term plans and considering a sensitivity analysis of the related industries.