New Delhi, Jan. 31: The government plans to cut down on tax sops to companies as part of a drill to reduce the base rate of corporate tax to 25 per cent from 30 per cent over the next three years.

The finance ministry wants to phase out profit-linked, investment-linked and area-based tax deductions in this and next year's budget.

At present, a 30 per cent tax is imposed on basic corporate income along with cess. After considering the deductions, the effective rate is just about 23 per cent .

"Profit-based tax sops, also called tax incentives, for businesses venturing into new and long-gestation areas such as oil exploration or refining, developing SEZs, power generation, infrastructure etc., will be phased out. Instead, we will bring a new scheme, which will allow a business to recover all capital and revenue expenses over a period and then make it liable to pay tax on profit," top revenue officials said.

SEZ developers are resisting attempts to reduce the incentives to them, but officials said there was no way out. "Either this year or the next, it has to go."

Area-based exemptions are considered as detrimental to balanced regional growth by funnelling industry into certain districts. Officials admitted that a blanket removal of the exemption would create a political uproar. Instead, they are proposing grandfathering of such sops, which means existing industries will continue to enjoy them for some more years but new industries won't.

"However, what we will not do is extend the sunset clause of any tax sop. For instance, if a business is supposed to get a tax incentive for 10 years then it will be allowed but it will not be extended by another year as was being done after industrialists lobbied for such extensions," officials said.

"The total revenue loss from incentives to corporate taxpayers was over Rs 62,000 crore," Prime Minister Narendra Modi told an audience of business leaders at a function last week.

However, the finance ministry believes that all incentives cannot be phased out. Incentives such as a deduction for research and development (R&D) or higher deductions under depreciation for purchase of new equipment or use of green technology will continue in some form.

However, the amount of deduction may change. Officials said the draft road map proposed the abolition of weighted deduction. Weighted deduction enables the taxpayer to claim more than the actual expenditure. For instance, pharma companies get a 200 per cent tax deduction on R&D expenditure, while cold chain units, warehousing facilities for storage of agricultural produce, affordable housing projects and fertiliser producers get weighted deduction of 150 per cent of their capital expenditure.

"We want only actual expenses on R&D or on infrastructure to be tax deductible," officials said. However, lobbying by the pharma companies may see some amount of weighted deductions to continue for a few more years.

Similarly, the amount of tax deduction permitted on account of depreciation may be limited. Officials said they had proposed slashing the highest rate of depreciation to 60 per cent from 100 per cent available to certain assets at present.