The Centre has tightened the depreciation norms in the Budget for 2003-04, making it difficult for service companies to claim a 25 per cent depreciation rate for their units.
Instead, under the new provisions of the Finance Bill, 2003, the revenue department has bifurcated the omnibus depreciation terms -- plants, buildings, furniture and fittings -- into two categories.
So, while plants will continue to enjoy a 25 per cent rate of depreciation, the rest will be entitled to a 15 per cent depreciation rate.
The tightening of the depreciation norms in the budget has been undertaken to ensure that companies like hospitals and even other service companies operating in urban areas do not claim depreciation at a high rate by classifying their buildings as plants.
A higher depreciation rate enables a company to claim a larger deduction from income tax liability for their investment, especially in the initial years.
Under the Income Tax Act, 1961, while the relevant depreciation rates are listed in Section 32, the definition of plant is spelt out in section 43 of the IT Act.
It says a plant would also include ships, vehicles, books, scientific apparatus and surgical equipment.
But government officials said the clubbing of buildings with it had introduced a loophole which was being increasingly exploited.
The explanatory memorandum also acknowledges that the coverage of the term plant had become a subject of litigation especially to decide whether buildings or furniture and fittings constituted a plant.
The Finance Bill has also reinserted the ambit of the term plant to include tea bushes and livestock to encourage these sectors to claim depreciation at the same rate of 25 per cent.
The provision was dropped in the finance act of 1995. It has also eased the valuation norms for assets to ease corporate mergers and demergers.
Accordingly the bill has decided to omit the words as appearing in the books of account from explanation 2B to clarify that the written down value of a block of assets in the case of a resulting company would be the written down value of the transferred assets of the demerged company.
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