Budget Special. Not much of a tax break for India Inc

Giving in to India Inc’s demands, the Government has proposed to lower the basic corporate tax rate from the current 30 per cent to 25 per cent over the next four years. At the same time, concessions available to companies for investments in notified areas, scientific research will also be rationalised.

Despite a high statutory tax rate of 30 per cent (excluding surcharge and education cess), the effective tax rate for Indian companies has been much lower at 23.2 per cent in 2013-14. Though this is higher than the 22.4 per cent in 2012-13, it is still lower than the mandated tax rate, thanks to the slew of tax incentives doled out to India Inc.

So which are the sections of India Inc which pay lower tax? One, state-owned companies enjoyed higher benefits with their tax incidence at 19 per cent in 2013-14. Companies in the private sector paid over 24 per cent of their taxable income to the Government.

Two, large Indian companies with profits in excess of ₹500 crore paid lower taxes than smaller companies. The effective tax rate for these companies for 2013-14 was 20.68 per cent.Smaller companies with taxable profits of up to ₹1 crore paid 26.9 per cent. Three, manufacturing companies have made the most of sops such as exemptions for Special Economic Zones, expansion in notified areas and accelerated depreciation.

The move to rationalise tax concessions and exemptions will increase the tax incidence for India Inc from the current 23.2 per cent to over 28 per cent by 2018-19. Large Indian companies with taxable profits in excess of ₹500 crore and state-owned companies will see a sharp jump in their tax outgo. Companies in the manufacturing space that enjoyed concessions on capital expenditure, exports may foot a bigger tax bill. Withdrawal of tax deductions provided to companies in the power generation and distribution space and oil and gas exploration sector under Sections 80-1A and 80-1B of the I-T Act may result in profit . Likewise, the deduction available to pharmaceutical and agrochemical companies for investment in scientific research, if rationalised, can lower profits.

The tax benefits available to companies which have manufacturing units located in SEZs and notified areas such as Uttaranchal may moderate too. Even as the reduction of corporate tax seems positive on the face of it, rationalisation of tax concessions may not augur well for India Inc’s profitability.