Tax holidaystill eludes the mining sector.
Nabin Ballodia
(The author is Director, KPMG.)
The mining industry, which is one of the lead indicators of a country's economic growth, had expectations from the revised Direct Taxes Code.
Tax holiday still eludes the sector; however, the proposed liberalisation introduced in the treatment of expenditure incurred on prospecting of minerals and development of mines by allowing it as deferred revenue expenditure might just bring some cheer to the sector.
Deduction of expenses
The existing income-tax law allows deduction of one-tenth of specified expenses incurred on prospecting of minerals, development of mines, and so on, during four years before commercial production, in the next 10 years, which is a sole respite for this sector under the present scenario. Further, the deduction is allowed from the year of commencement of commercial production.
The DTC regime proposes that such expenditure will be treated as deferred revenue expenditure and shall be allowable for ten consecutive financial years, the first such financial year of allowability being the year in which such amount is actually paid. In other words, the expenditure incurred on prospecting for minerals or development of mines are now allowable on deferred basis in the year of incurrence and nine subsequent financial years irrespective of whether the commercial production has commenced or not.
This is a welcome move considering that, at times, mining companies have to go through long gestation periods even beyond four years till the time mineral deposits are proven, in which case pre-commencement expenditure incurred for more than four years amounted to dead loss as per the current system.
Realigning MAT
Another major concession proposed in the revised DTC is the proposal to realign Minimum Alternate Tax (MAT) to book profits, which is largely in line with the present system and not on gross assets as was suggested in the earlier draft. The MAT rate of 20 per cent under DTC is also in line with the current income-tax law wherein the effective MAT rate after surcharge and cess stands at 19.93 per cent.
Further, the MAT credit is now allowed to be carried forward for 15 years as against the existing limit of 10 years under the current system.
The realignment of MAT to book profits comes as a major relief particularly for those mining companies which are in their prospecting stage, as an asset-based MAT does not have any proximate linkage with a particular year's income or turnover and would have lead to significant hardships for such companies in the absence of sufficient resources to pay taxes.
A favourable tax and regulatory environment is key to the growth of any sector.
Although steps have been taken in this direction by liberalising foreign investment in the mining sector, further support by way of providing tax benefits specific to the industry is required so as give an impetus to the sector which contributes a reasonable percentage of our national GDP and provides employment to millions of people.
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