Restriction of tax depreciation rate to 40%

The Government released anotification no 1032016 dated Nov 7, amending Rule 5 of the Income Tax Rules.

Restriction of tax depreciation rate to 40%:Rule 5 provides manner of computation of depreciation available u/s 32 of Income Tax Act to all the taxpayers. Rule 5 refers to New Appendix 1 to Income Tax Rules wherein tax rates for various block of assets (like 5%, 10%, 25%, 60%, 100% etc) are provided. The Notification restricts the highest rate of depreciation to 40% for all assets which were eligible for depreciation at a rate higher than 40%.This applies to newly set-up domestic manufacturing companies set up andregistered on or after 1 March 2016, which opt for concessional rate of 25% rate of tax (instead of normal rate of 30%) without any tax incentives. "(a) in rule 5, after sub-rule (1), the following proviso shall be inserted with effect from 1st day of April, 2016, namely:- Provided that in case of a domestic company which has exercised option under sub-section (4) of section 115BA, theallowance under clause (ii) of sub-section (1) of section 32 in respect of depreciation of any block of assets entitled tomore than forty per cent. shall be restricted to forty per cent. on the written down value of such block of assets." Interestingly, there is also a clause (b) in the same notification, which states that "in the New Appendix I, in the Table, in the second column, for the figures 50, 60, 80, 100 , wherever they occur, the figure 40 shall be substituted with effect from the 1st day of April, 2017". "(b) in the New Appendix I, in the Table, in the second column, for the figures 50, 60, 80, 100 , wherever theyoccur, the figure 40 shall be substituted with effect from the 1st day of April, 2017." Clause (b) does not make any reference to changes in clause (a), nor does it make any reference to companies opting for concessional tax u/s 115BA.

Restriction of tax depreciation rate to 40%

Conclusion A plain reading of clause (b) would have an effect that depreciation rate will be capped to 40% forall categoriesof taxpayers. But the intention of notification seems to restrict depreciation only in respect of companies covered by Sec 115BA. This is matter of ambiguity & It would be very helpful if CBDT issues clarification on this issue.

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