MUMBAI: A dilemma has gripped numerous loss-making companies in capital-extensive sectors along with metal, infrastructure, and engineering — whether or not to opt for lower corporate tax rates and boom profitability, or pay better taxes under modern quotes and carry forward the losses.
Many such companies that have made a huge capital expenditure in the past few years are achieving out to their tax advisers for an answer.
Depreciation claimed on new vegetation and machinery has allowed them to file net losses, which they could convey ahead over an eight-12 months length underneath the modern-day policies and use to offset destiny profits. Many do this in a staggered way, to reduce internet income and pay decrease tax.
This benefit of carrying ahead losses won’t be to be had underneath the brand new tax slabs announced by finance minister Nirmala Sitharaman last Friday, tax specialists said. The authorities slashed the corporate tax charge to 22% from 30% for existing groups, and to 15% from 25% for brand new production groups.
Including a surcharge and cess, the powerful tax charge for present organizations could now come down to 25.17% from 35%. Companies can opt for better tax charges or the brand new ones.
“The powerful tax charge for several companies that are loss-making and are capable of bringing ahead losses due to depreciation can be less than 25% and so they will examine whether they want to move to the new tax regime,” stated Sudhir Kapadia, the countrywide tax leader at EY India.
The selection to transport to the new, simpler tax fee can be made anytime in destiny, and the corporations have time to do a scenario planning, he said.
Depreciation is generally calculated on new investments like plant and machinery. At an everyday rate, up to 15% depreciation is permitted within the first year. Manufacturing organizations can claim up to 20% extra depreciation on newly set up flowers and machinery every 12 months. This makes them eligible to say a total depreciation of 35%. This is accounting access inside the income and loss account and affects the bottom line and the tax outgo.
Many companies that are making losses and feature lately invested in vegetation and machinery among other capital expenditures can claim the extra depreciation, a non-coins loss, or acquire it over eight years. If those organizations flow to the lower tax regime, then they will now not be able to deliver forward the unclaimed quantity, in keeping with industry trackers.
“These corporations will write off deferred tax assets they may have booked related to these losses if they prefer to cross below the 22% tax regime,” stated Gautam Mehra, leader, tax and regulatory services, at PwC India.
While a few tax experts stated wearing ahead of extra depreciation became just like the difficulty of the minimal change tax (MAT), other stated it became separate accounting access, and the authorities had to provide a clarification on that.
“The question of availability of unutilised depreciation bobbing up from extra depreciation as one of the incentive provisions, in case a company chooses lower tax price, is distinguishable from the problem of utilised MAT credit and merits favourable rationalization,” Vipul R Jhaveri, dealing with companion, tax and regulatory, Deloitte Haskins & Sells.
MAT has been a prime issue for businesses found in unique economic zones and has tax vacations. These corporations pay MAT at 20% effective price and might collect the credit score to set it off when the tax holiday ends. If they pick out to transport to the new tax regime and decrease MAT charge, then they may end up losing out on the collected credit.