BL Research Bureau

While tax rates cuts have been announced every year since 2016 Budget, due to increase in surcharge on corporate tax and increase in cess, effective tax rates have only gone up. But now with across the board cut in the statutory rate from 30 per cent to 22 per cent, corporates will see some real benefits (of course, only if they let go of incentives).

The tax on buy backs which was announced in last Budget in July at 20 per cent has now been exempted for companies that have announced buy backs before July 5th, 2019.

The MAT rate has also been slashed to 15 per cent from 18.5 per cent.

When for the first time Arun Jaitley announced the phased reduction of corporate tax rates in the Budget 2015-16 with the intention to plug tax-leakages, he said that the corporate tax rate will reduce from 30 per cent to 25 per cent along with elimination of exemptions. But now, the statutory rate has been moved further down to 22 per cent, and this is across the board – irrespective of revenues the companies make.

Effective tax rate is higher compared to five years back

The effective tax rate has only gone up in recent years, due to phasing out of incentives and profit linked deductions and the increase in surcharge and cess.

From 23.22 per cent in 2013-14, the effective tax rate increased to 28.24 per cent in 2015-16 despite tax cuts as surcharge for corporates was increased. That year, for companies with an income of up to ₹10 crore, surcharge was increased from 5 per cent to 7 per cent and for corporates with income above ₹10 crore, it was increased from 10 per cent to 12 per cent.

While in 2016-17, there was a small drop in the effective tax rate, it scaled up again in 2017-18. In 2017-18, the effective tax rate was 29.49 per cent. If we breakdown numbers, we also see that as desired by the government, the tax rates have gone up for larger companies with smaller ones seeing relief. The effective tax rate for companies making a profit of more than Rs 500 crore increased to 26.3 per cent in 2017-18 from 23.94 per cent in 2016-17. And, companies making a profit of Rs 1-10 crore, saw effective tax rate come down from 29.2 per cent to 27.38 per cent.

An analysis of companies in the listed space also shows tax collection for the government only going up. From the entire universe of profitable companies in the listed space, it appears that the government has been successful in drawing more tax to its kitty – the effective tax rate for all listed companies for 2018-19 was 25.8 per cent. This was 24 per cent in 2013-14.

The FM has also provided lower corporate tax rate of 15 per cent for new manufacturing companies incorporated after October 1, 2019. Late Finance Minister Arun Jaitley had announced lower tax rate of 25 per cent for all new manufacturing companies incorporated after March 1, 2016.

Impact of current move: Tax kitty may see drop

While the effective tax rate has been going up in recent years, the current move may bring it down. The statutory rate of 22 per cent which comes to 25.17 per cent with surcharge and cess is for all companies irrespective of their turnover who do not make use of tax incentives. Further, the cut in MAT rate will also bring significant impact on the tax kitty. SEZ developers, infrastructure and cement companies ( such as The Ramco Cement, India Cements, SCI, GE Shipping and JK Tyres) having units in specified locations in the North-East region, and export companies are set to see a benefit now with reduction in MAT.

The Finance Minister has announced that the impact of the cut in corporate tax rate and other moves will see the government forego a revenue of Rs 1.45 lakh crore per year.

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