If ‘Thank God It’s Friday!’ is an expression often used in the corporate world to indicate relief from a dreadful work week, the Friday of September 20, 2019, would mark a watershed moment of relief for most corporate taxpayers.
In a single stroke, domestic companies have been handed a mid-year bonanza with the headline tax rates seeing a reduction by about a third. To put things in context, the Finance Ministry’s own estimate quantifies the relief at about ₹1.45 lakh crore; a sum more than 4x of the yearly net profit of India’s largest corporate conglomerate or 7x of the largest private bank.
With effect from April 1, 2019, the government has introduced a host of changes — from an option to choose a reduced rate of tax of 22 per cent for corporates and giving a push to the ‘Make in India’ initiative by providing reduced corporate tax rate of 15 per cent for entities incorporated after October 1, 2019, to reducing surcharge on capital gains arising from listed securities. These are only some of the headline changes brought in by the government.
Tax rate option
With the new ordinance, existing domestic companies can opt to pay tax under a base rate of 22 per cent as against the existing 30 per cent. Including surcharge and applicable cess, the effective tax rates have been reduced from 34.944 per cent to 25.168 per cent. The only precondition is that no other tax holiday/exemption can be claimed by such companies. Reduction in tax rates has been one of the long-standing demands from India Inc and would leave monies in the hands of corporates for both investments and growth.
To accelerate the ‘Make in India’ movement, the setting up of new domestic manufacturing companies incorporated after October 1, 2019, has been incentivised with a reduced corporate tax rate of 15 per cent with some conditions such as commencement of production by March 31, 2022. The effective rate of tax for such companies is only 17.16 per cent.
Read also: How to make the corporate tax cuts work
Capital gains on listed securities (liable to securities transaction tax), units of business trusts and units of equity-oriented mutual funds were subject to a base tax rate of 15 per cent, or 10 per cent in case held for more than one year. The ordinance has removed the capped surcharge applicable on such transactions to 15 per cent, thereby giving a relief of up to 2.29 per cent/3.43 per cent on such capital gains.
In addition to the relief of surcharge to all FPIs regardless of their corporate structure, the tax ordinance extends the surcharge waiver to transactions in derivatives entered into by FPIs.
At a time when the liquidity situation has been a burning concern and corporates have been hamstrung to make investments, the monies saved through tax relief can act as a catalyst in many ways. Banks and other financial institutions would be beneficiaries as they would now have higher profits to set off any potential provisions, increase their capital base, or use the funds for loan growth.
Tax savings passed on by such companies to consumers could revive the animal spirits through additional consumption, higher employment and increased wages, spurring further consumption. And the specific relief given to manufacturing companies shows the government’s keen focus on making India a manufacturing hub not just for domestic consumption but for export markets too.
More clarity needed
However, the amendments brought in the ordinance has left a few open questions on whether the existing MAT credit can be utilised by companies to set off payment of the lower corporate taxes; and whether sectors like IT/software development constitute manufacturing eligible for the lower tax rate of 15 per cent considering that these sectors are the highest forex earners for the country.
It is also interesting to note that LLPs are not eligible for the lower relief and will be subject to 30 per cent tax rate. On the principle of horizontal equity, extension of such a benefit to LLPs would be welcome.
While the tax law allows for a lower rate of 22 per cent/15 per cent, the tax officer is vested with the power to make additions to a party transacting with a lower taxed corporate, if he believes there is a close connection between such parties and the lower taxed corporate has earned higher than reasonable profits. It is recommended that some safeguards like high threshold and approving panel be introduced to prevent widespread use and litigation around this provision.
While the proposals are positive, one hopes that the administration of these benefits by all stakeholders are done in a manner that the economic ends it seeks to achieve are met.
The writer is Tax Partner, EY India. Views are personal