The change

Corporates whose turnover is ₹250 crore or less in 2016-17 can now enjoy a lower tax rate of 25 per cent versus 30 per cent earlier. The effective tax rate for this bunch of companies (assuming income of less than ₹10 crore) comes to 27.82 per cent now compared to 33.06 per cent earlier. Had the education cess not been hiked to 4 per cent from 3 per cent currently, the effective tax rate would have been an even lower 27.55 per cent. Of the listed universe of 4,600 stocks, 3,360-plus stocks (73 per cent) have a turnover of ₹250 crore or less.

The Finance Minister, however, dashed the hopes of corporates on removal of dividend distribution tax (DDT). Thus, all big dividend payers of the listed universe, including Coal India, TCS, Indian Oil Corporation, ONGC and Infosys, will have to continue to cough up DDT from their pockets at the rate of 15 per cent (the effective tax rate is 20.55 per cent, including surcharge and tax). Small infrastructure, cement and other companies expecting a relief on MAT (minimum alternate tax) from 18.5 per cent to 15 per cent were also disappointed.

The background

It all started in 2015-16, with the Finance Minister announcing that corporate tax would be cut from 30 per cent to 25 per cent over a period of four years, with deductions and exemptions getting phased out simultaneously. But, the corporate sector couldn’t heave a sigh of relief, as in the same year, the Minister also silently increased the surcharge on corporate tax, for companies with an income of up to ₹10 crore — from 5 per cent to 7 per cent and for an income above ₹10 crore — from 10 per cent to 12 per cent. The effective tax rate in 2015-16 thus turned out be sharply higher — 28.24 per cent versus 24.67 per cent in the previous year.

In 2016-17, the Finance Minister cut the tax rate for companies making a profit of not more than ₹5 crore to 29 per cent. Also, all new manufacturing companies incorporated after March 1, 2016 were given an option to be taxed at 25 per cent provided they did not claim any exemptions.

The Minister also said that with effect from April 1, 2017, the investment-linked deduction available on scientific research would be cut. The sunset date for commencement of operations for infrastructure and SEZ developers was set at April 1, 2017. He also stated that units in SEZs commencing production after April 1, 2020, cannot claim any deduction.

In the next year — 2017-18 — the Finance Minister extended the tax relief to a larger section of corporates. Companies with an annual turnover of ₹50 crore or less saw their tax rate being cut to 25 per cent. The effective tax rate in 2016-17 was 26.89 per cent, versus 28.24 per cent in the previous year.

The verdict

It is a move inthe right direction. However, only when the tax cut comes down across the board, will India Inc’s competitive edge improve.

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