The Union budget has reduced the depreciation rate on general plant and machinery from 25 per cent to 15 per cent for income tax purposes. Companies will be allowed a higher initial depreciation of 20 per cent, though it is not clear how long the initial period would be. Also, the condition of 10 per cent addition to capital assets for claiming higher initial depreciation is proposed to be removed. The move would bring the income tax depreciation rates more in line with the rates under Companies Act. Higher depreciation under income tax rules meant that companies would have lower net asset values of fixed assets in the initial years compared to the book values under the Companies Act.
The higher depreciation rates under Income Tax Act were intended to encourage capital investments by reducing overall tax incidence. With the lowering of corporate tax rates, the impact will be bearable for existing players. This move could result in higher taxes for new investments in capital-intensive sectors like metals, oil refining, gas pipelines, petrochemicals, aviation, power generation and transmission, etc.
This may not have much of an impact as new companies in capital-intensive sectors hardly make profits during initial years and they can always claim unclaimed depreciation whenever they have taxable profits. However, this may be a dampener for established and profitable companies going in for capital investments for capacity expansion or productivity improvements. Then again, companies should be making capital investments for the sake of their business competitiveness and not for availing tax breaks.