Income tax for companies with annual turnover up to ₹50 crore has been reduced to 25% from 30% in order to make Micro, Small and Medium Enterprises (MSME) companies more viable and also to encourage firms to migrate to a company format.
This move will benefit 96% or 6.67 lakh of the 6.94 lakh companies filing returns of lower taxation and make MSME sector more competitive as compared with large companies.
However, bigger firms have shown their disappointment since the proposal for reducing tax rates was to make Indian firms competitive globally and it is the large firms that are competing globally. The Finance Minister foregone revenue estimate of ₹7,200 crore per annum for this for this measure.
Besides, the Finance Minister refrained from removing or reducing Minimum Alternate Tax (MAT), a popular demand from India Inc., but provided a higher period of 15 years for carry forward of future credit claims, instead of the existing 10-year period.
“It is not practical to remove or reduce MAT at present. However, in order to allow companies to use MAT credit in future years, I propose to allow carry forward of MAT upto a period of 15 years instead of 10 years at present,” said Mr. Jaitley in his Budget speech.
MAT is at present levied as an advance tax. Although the plan for phasing-out of exemptions will kick in from April 1, 2017, the full benefit of revenue out of phase-out will be available to the Government only after 7 to 10 years when all those who are already availing exemptions at present complete their period of availment, according to a Finance Ministry statement.
“There was an expectation that the rate of MAT will be reduced in line with its goal of reducing the headline corporate tax rate to 25%. However, instead of that, the rate has been retained and a higher period of 15 years for carry forward for future credit claim has been provided, instead of the existing 10 year period. While this is welcome, a reduction in the rate should have been made,” said Abhishek Goenka, Partner – Tax & Regulatory Services, PwC.
Justifying the corporate tax rate Mr. Jaitley said: “I had, in my last budget speech mooted the proposal to reduce the rate of corporate tax from 30% to 25% over a period, accompanied by rationalization 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 % because of various exemptions which they are availing of.”
Some of the exemptions and tax incentives that government is planning to phase out includes accelerated depreciation provided under IT Act, that will be limited to maximum 40% from April 1 and the benefit of deductions for research would be limited to 150% from April 1 and 100% from April 1, 2020.
Besides, the benefit of section 10AA to new SEZ units will be available to those units which commence activity before March 31, 2020 and the weighted deduction under section 35CCD for skill development will continue up to April 1, 2020.
The government plans to reduce corporate tax rate only after calibrating with additional revenue expected from phasing out incentives as the benefits from phasing out of exemptions are available to Government only gradually.
The budget made a beginning by offering the new manufacturing companies which are incorporated on or after March 1, 2016 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.
