Date:01/03/2005 URL: http://www.thehindubusinessline.com/2005/03/01/stories/2005030102690700.htm

Back Gain for cos with lower depreciation charges

Krishnan Thiagarajan
B. Krishnakumar

THE direct tax proposals announced in the Union Budget 2005-06 are expected to have a far-reaching impact on the corporate sector.

The corporate tax rates, including surcharge and education cess, for domestic companies are proposed to be reduced from 36.6 to 33.6 per cent.

But the implications of this change would have been straightforward, if the Finance Minister has left it there. But this reduction in corporate tax has been dovetailed with a reduction in the depreciation rates applicable to general plant and machinery from 25 per cent to 15 per cent. Rates of depreciation of other capital assets are also being rationalised in line with the reduction in the rate for general machinery and plant.

This effectively means that companies having a relatively lower depreciation charge would stand to benefit in the form of net drop in tax outgo while the ones having a higher depreciation charge would attract higher tax payable.

Capital-intensive companies such as Indian Oil, Maruti Udyog, Tata Steel, GAIL (India), BPCL, National Aluminium and Grasim Industries could see a net increase in their tax outgo owing to the recent proposals. They, however, can gain more for their fresh investments and offset any increase in tax incidence.

In contrast, companies in the FMCG, banking and financial services sector (with a couple of exceptions) may turn out to be the beneficiaries of lower taxes.

Over and above these proposals, the Finance Minister has introduced a new tax called "fringe benefit tax" which would be borne by the employer.

The tax is introduced with an objective to bring perquisites and benefits extended to employees, where attribution of personal benefit is difficult to establish, under the tax net. In such cases, fringe benefit tax would be levied at the rate of 30 per cent of a proportion of certain specified expenditure. The impact would vary from company to company.

The proposals could cause some concern for companies as the Finance Minister has budgeted for a 33 per cent rise in corporate tax collections. Companies would be hoping that the revival in industrial activity helps them accommodate the Finance Minister's wishes without affecting their profitability.