Indian companies will have to wait longer before the government makes good on its promise to reduce corporate tax rates. On Monday, finance minister Arun Jaitley said his government will reduce corporate tax rates only after removing exemptions that allowed companies to cut down on their effective tax payouts.
He, however, made an exception for small enterprises with turnover not exceeding Rs 5 crore (in the financial year ending March 2015), which will attract a slightly lower tax rate of 29%.
The reduction in corporate tax rate has to be calibrated with additional revenue expected from incentives phased out, he said . The benefits from phasing out exemptions would only be gradually available to the government; so, in the first phase, two changes are proposed in corporate income-tax rates, Jaitley said.
Besides the marginal reduction tax on small enterprise, Jaitley said new manufacturing companies that are incorporated on or after March 1, 2016, are proposed to be given an option to be taxed at 25% plus surcharge and cess, provided they do not claim profit-linked or investment-linked deductions and do not avail of investment allowance and accelerated depreciation.
The move signals the beginning of reforms of one of India’s complex tax systems that had been mired in layers of exemption and sops over years, making it difficult to administer.
According to the revenue foregone statement in the budget, the impact of major incentives given to the corporate sector, including tax holidays and accelerated depreciation, in the current fiscal is more than Rs 68,710 crore.
In his last budget speech, the finance ministry had mooted the proposal to reduce the rate of corporate tax from 30% to 25% over a period, accompanied by rationalisation and removal of various tax exemptions and incentives. In any case, the effective rate of tax paid by companies comes to an average of 24.67% due to various exemptions availed by them.
Based on suggestions received from stakeholders over the last year, the final plan of phasing out exemptions will be undertaken by the government, said Jaitley. In the Union Budget 2016-17, he has provided that the accelerated depreciation under the IT Act will be limited to maximum 40% from April 1, 2017.
Further, the benefit of deductions for research would be limited to 150% from April 1, 2017, and 100% from April 1, 2020. The benefit of section 10AA to new SEZ units will be available to those units that commence activity before March 31, 2020, and the weighted deduction under section 35CCD for skill development will continue up to April 1, 2020.
In November, the government laid down a comprehensive road map for phasing out corporate tax exemptions over the next two years to simplify administration and improve India’s competitive edge globally. The move could hurt companies that have benefitted from these exemptions for years, at least in the short to the medium term.