1. Depreciation under the Income Tax Act is not merely a provision for charging against taxable profits the capital expenditure incurred by an undertaking on the depreciable asset over the useful lives of the assets.
It is also aimed at working as a tax incentive measure affecting the cash flow of business enterprises and the generation of internal resources for the replacement of assets that have outlived their utility.
2. The taxpayer should have the option in respect of the actual quantum of depreciation to be claimed against the profits from year to year.
This is subject, however, to a maximum rate specified in the law, which will be applied to the value except in the case of ocean-going ships, where the existing pattern continues. In this regard, the maximum levels of depreciation should be:
- Buildings (including roads, culverts, bridges, etc.) = 10%
- Furniture and fixtures = 20%
- Plant and machinery = 40%
3. The option given to the taxpayer should be limited to choosing one single rate for all assets falling within a class (e.g., buildings, etc.) and they should not be allowed to adopt different rates for different items falling within the same class.
4. A total latitude to taxpayers in the matter of choosing depreciation rates is not desirable. This is because it that might disturb the budgetary position of the government.
5. The tax incentives should be retained with the business for further development and not frittered away by the taxpayer.
6. Full write-off (i.e., depreciation at 100%) should be allowed in the case of all assets where the actual cost of an asset does not exceed $10,000.
7. In cases where no books of account are maintained, depreciation should be allowed at the uniform rate of 10% for buildings and 20% for plant and machinery, and the reducing balance method should be used for furniture and fixtures.
8. If a company desires a nil allowance in income tax, it should not charge the profit and loss account of that year but should disclose such areas of depreciation by way of a note on the accounts, as permitted by the Companies Act.
9. In dealing with business concerns as going concerns not operating with a view to liquidation, calculation of depreciation separately for each item of asset is unnecessary.
At every stage of the addition of new assets, the cost of the new assets should be aggregated with the written-down value of the existing block and depreciation allowed on such a consolidated block.
10. The provisions for extra shift allowance in respect of machinery and plant used in factories and approved hotels should be discontinued.
11. The existing provisions for carrying forward absorbed depreciation should continue.
The benefit of carrying forward and setting off unabsorbed depreciation should be allowed whether or not the asset in question continues to be used for the purposes of the business in the succeeding accounting years.
12. Where the depreciable assets of a business are taken over by the government or any statutory authority, Section 41 (2) applies.
Specifically, no profit will be taxed under Section 41 (2) if the taxpayer reinvests the sales proceeds or compensation money in the acquisition of other depreciable assets for any business within a period of three years from the date of acquisition.
13. The law should be classified to provide that depreciation under Section 32 shall be allowable in respect of capital expenditure for scientific research qualifying for deduction under Section 35.
14. The following items of expenditure should be eligible for amortization against the profits of a business over a ten-year period for tax purposes:
- Pre-operative expenses on administration and accounts
- Departmental expenditures (and other such expenditures) that do not directly relate to the creation or acquisition of assets
- Expenses to relocate a factory
- Payment for acquisition of intangible assets for which there is no other provision for amortization
- Expenses to construct railway sidings and roads on land not belonging to the taxpayer
15. Any instance of business expenditure that results in disallowance as revenue expenditure and non-allowance of depreciation should be promptly notified under Section 35D(2)(d) as and when the attention of the government is drawn to it.
16. The limitation on the totality of preliminary expenditure now appearing under subsection (3) of Section 35D should be removed.
17. The following simple formula should be presented for amortization of expenditure on the production of feature films in place of the complicated procedure laid down in Rule 9A of Income Tax Rules:
- If the film is released 90 days prior to the close of the accounting years in which the production is completed, the entire cost of production should be allowed as a deduction in the relevant previous year
- If the film is released at any time within the abovementioned period, 60% of the production cost should be allowed in that accounting year and the remaining 40% in the immediately succeeding accounting year
18. As the dollar has been decoupled from the shirting and the foreign exchange, its value fluctuates over time (as computed with reference to other currencies), meaning that the provisions of Section 48A have become cumbersome and difficult to apply.