Has Govt notification unintentionally restricted depreciation rate to 40% for all taxpayers?
The Government released a notification no 103/2016 dated Nov 7, amending Rule 5 of the Income Tax Rules. 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 Rule 5 has been amended w.e.f. April 1, 2016 and inserts a new proviso restricting depreciation allowance to 40% in case of domestic companies opting concessional taxation under newly inserted Sec 115BA. Finance Act, 2016 introduced Sec. 115BA to provide concessional tax rate of 25% to newly setup domestic companies engaged solely in the business of manufacture or production. The amended Rule 5 provides that in case of domestic companies opting concessional taxation u/s 115BA(4), the depreciation allowance u/s 32(1)(ii) in respect of any block of assets entitled to more than 40%, shall be restricted to 40% on the written down value of such block of assets.
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. Therefore, a strict reading of clause (b) would have an effect that depreciation rate will be capped to 40% for all categories of taxpayers.
This would include assets such as computers (eligible for depreciation at 60%), energy saving devices (80%), renewable energy devices like solar or windmill (80%) or air/water pollution control equipment (100%).
Based on the overall 'spirit' of the notification, the intention seems to restrict depreciation only in respect of companies covered by Sec 115BA. However, a strict reading suggests otherwise. Hence, a clarification on this aspect from the CBDT would be immensely helpful.