FM Arun Jaitley looks at liberal investment allowance in Budget

The finance ministry is considering a proposal to liberalise incentives to boost slowing corporate investment in the manufacturing sector.

According to sources, the feedback the government has got from industry is that the 15-per cent investment allowance to boost investment in the manufacturing sector is not working well at the ground level due to restrictive clauses that prevent even genuine investors from availing the benefits.

At the heart of the matter is Section 32AC in the Income Tax Act, 1961, which introduced the allowance in 2013 to boost manufacturing.

Section 32AC (1A) states that in order to avail the tax benefit, new plant and machinery being acquired must also be installed in the very same year. However, in practice, the mismatch between the year of acquisition and installation of the plant and machinery results in investors being denied the tax allowance incentive even though they qualify in terms of the quantum of investment involved.

Sources added that the ministry is looking at whether this clause should be allowed in the year that the plant and machinery is installed and the factory building is completed instead of on the basis of 'acquisition and installation'.

This would make it easier for investors to benefit from the investment allowance and fulfil the aim of boosting the manufacturing sector in tune with the new 'Make in India' policy.

The incentive is also not available for assets on which 100-per cent depreciation is applicable. Consequently, plant and machinery items in the power sector and energy saving devices, which enjoy 100-per cent depreciation benefit, are not eligible for the allowance.

The ministry is examining whether the allowance should also be extended to cover plant and machinery eligible for 100-per cent depreciation.

The Section also excludes computers despite the fact that computerised systems are part of any plant and machinery equipment in modern factories. Besides, the clause excludes the cost of building, which constitutes a significant portion of total investment, and the ministry is considering whether this cost should be included as part of the total investment eligible for the tax benefit.

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