The finance ministry's 'sop' by way of increasing the existing rate of initial depreciation of 15 per cent to 20 per cent would not be able to neutralise the adverse impact of the reduced depreciation, FICCI has said.
According to the industry chamber, the proposal to reduce the rate of depreciation for general machinery and plant to 15 per cent from the existing rate of 25 per cent has sent India Inc. Into a tizzy.
FICCI has expressed serious concern as estimates show that due to reduction in depreciation rate, tax liability of a medium-sized company in the electronic hardware sector would shoot up from the existing Rs 53.42 lakh to Rs 82.80 lakh, an increase of 55 per cent.
Plant and Machinery, as per the new rate, will depreciate to the extent of 95 per cent in 20 years whereas prior to the budget, it would have depreciated to the extent of 95 per cent in 12 years, a FICCI press release said.
As per the existing system of computing depreciation on the basis of written down value method, the effective life of the assets is around 11 years, whereas with the reduction of depreciation rate to 15 per cent, the effective life of the asset will go up to 18 to 19 years.
FICCI has pointed out that the reduction in depreciation rates, which will increase the payback period of the capital cost of an asset, is not in step with the dynamism in the economy characterised by rapid technological advancement.
