By Rajiv Memani
Finance minister Nirmala Sitharaman’s announcement on Friday to slash the basic corporate-tax rates to 22% for all domestic companies without tax exemptions or incentives, and 15% for new manufacturing companies is a bold move. It is, indeed, the most significant corporate tax reform after the goods and services tax (GST).
The new rate should reduce the cost of capital and catalyse investments by repositioning India as one of the most competitive economies. In a way, GoI has handed over its own corpus of about Rs 1.45 lakh crore to India Inc to improve its balance-sheet. The alacrity with which it has acted after a series of engagements with industry is commendable. It is now for India Inc to rekindle its entrepreneurial spirit and make fresh investments.
Some of the decisions announced are in alignment with the proposals made by the task force on the new direct tax law. On the rate front, however, the reforms have gone much beyond those recommendations. The option of a 17.01% effective tax rate for new domestic companies incorporated after October 1, 2019, making fresh investments in manufacturing and commencing operations by March 31, 2023, is one of the most competitive tax rates in the world.
Even for existing companies, the new effective tax rate of 25.17% is lower than the GoI’s own estimate. Hitherto, the average effective tax rate for all profit-making companies, inclusive of surcharge and cess, was, post-incentives, 29.49%. The option for companies to adopt concessional tax without exemptions and incentives lends fairness and simplicity, which should encourage better compliance and reduce litigation.
Corporate income tax (CIT) is 25% in China and Indonesia, and 30% in the Philippines. The new rate for India becomes much closer to the OECD average of 21.4%. The US witnessed a far-reaching impact after reducing its CIT to 21%. However, considering the combined impact of state-level income tax applicable in the US, India will be more competitive than some US states. This advantage will strengthen India’s position to leverage opportunities in the global supply chains being disrupted due to the US-China trade war.
There is also a sweetener in the form of exemption from minimum alternate tax (MAT), a huge relief for companies, especially loss-making enterprises and those that have converged to
Indian Accounting Standards
(Ind-AS). The exemption eliminates scope for litigation on accounting and fair valuation adjustments.
There may be transitional adjustments for deferred tax assets and MAT credit as an accounting offshoot of the corporate-tax reductions. But industry should not mind, given the larger interest of substantial savings in future tax liability.
Another welcome measure is the relief from buyback tax for listed companies, which had announced buyback plans before the Budget was announcement. The companies were worried about the retrospective impact of the announcement, which made them liable to pay additional 20% buyback tax. Recognising concerns, the FM has decided that tax on buyback of shares, prior to the Budget announcement on July 5, for such companies won’t be charged. For any future buyback arrangements, GoI should provide the right mechanism for estimating tax on such transactions, so that investors do not suffer double taxation on the same capital.
Until now, companies were allowed to provide
corporate social responsibility
(CSR) funds to technology incubators located within GoI-approved academic institutions. The expansion in the scope of mandatory CSR spending of 2% by including payments to central or state government-funded or recognised R&D institutions provides an opportunity to companies to better comply with CSR requirements. It will also help channelise more funds towards research.
These announcements and other measures are estimated to make a dent of Rs 1.45 lakh crore to government revenues. There have been arguments that, given the constrained fiscal situation, any stimulus package may be precarious. However, the booster shot of low taxes was much needed. If GoI accelerates disinvestment, the fiscal burden can be partially alleviated. Moreover, lowering of corporate-tax rate will widen the tax net and gradually increase revenues.
Recent measures to stimulate exports and the housing sector, together with steps taken on the consumption side, demonstrate GoI’s commitment to growth.
The writer is chairman, India, EY