If we define accelerated depreciation we can say simply that it the technique to save tax money by charging high depreciation in beginning of years. This concept is yield in USA accounting system and the main motive is to charge depreciation as loss in profit and loss account's debit side with higher rate so that in beginning years tax amount will save.
First of all I tell you what the history beyond this is. USA accountant are so expert for saving tax with adopting always new system because there is capitalism system of economy not socialistic economy system. The entrepreneurs' main aim to maximize their profit by any way.
Suppose if a firm has purchased an asset of $ 100 and its working life is 10 years and its depreciation is $ 10 per year for ten years with simple straight line method of depreciation . Tax rate is 10% on net profit.
Now, USA Tax code, USA businessmen allow to charge high depreciation for completing the value of fixed assets in beginning of years. So, USA accountant started charge $ 20 as accelerated depreciation with in 5 years, they want to cover the value of fixed asset.
Now its effect on Tax
- Today value of money is high than after 5 year value of money because adding of interest on money, so charging accelerated depreciation technique, businessmen of USA get the benefit of value of money.
- Tax of first five is now less because high rate accelerated depreciation will charge on the debit side of balance sheet so this fund also can utilized for any higher earning projects.
Technique of Accelerated depreciation used in India
Under income tax law, there is no provision for charging depreciation with higher value or rate for getting the benefit of time value of money, Income tax law 1961 provides written down method to all companies with his own rate of specific assets.
Now some of business or companies are getting benefit under accelerated depreciation in India also.
- We can take two example one is Commercial Vehicles on its purchasing 50 % accelerated depreciation is allowed.
- Second example is of Enercon (India) Limited who is getting fiscal benefit from Central govt. tax u/s 10(23) G in the form of charging 10% accelerated depreciation.