Corporation tax rate cut to simplify tax administration, reduce litigation

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It is not surprising that with the economy in the grip of a slowdown, the finance minister had to show action and demonstrate intent. What is surprising, though admittedly pleasantly, is that the minister chose to make significant changes to the corporation tax rate. This signifies that governments will need to be nimble and proactive to bring in changes — even through ordinances — given that the need to address the issues of the economy and businesses cannot wait for a normal Budget cycle of a year.


The corporation tax rate has been reduced from the existing 30-25 per cent (depending on the turnover thresholds) to 22 per cent (effective rate 25.17 per cent, including surcharge and cess) for all the domestic companies, subject to them not availing of a specified list of exemptions. These include among others, exemptions available to units in special economic zones, deductions for certain scientific research expenditure, additional depreciation available on fresh investments and the losses, if any, attributable to such deductions. The minimum alternate tax (MAT) which was introduced to facilitate the taxation of zero-tax companies will also not be applicable to companies claiming the reduced rate of taxation. 

Companies claiming exemptions can continue to avail them and pay taxes at pre-amended rates, that is, 25/30 per cent. They may opt to pay taxes at lower rates at a future date. However, the option to pay taxes at the reduced rate of 22 per cent, once selected cannot be changed. Significantly, where the companies continue to avail the exemptions, the MAT rate has been reduced from 18.5 per cent to 15 per cent.


Although the reduced rates seem lucrative, one needs to carefully consider the options in the backdrop of stipulations relating to giving up of exemptions and tax holidays. Though it may be an easier prediction for companies engaged in the service sector, the rate selection for others, especially in the manufacturing sector, needs to be planned, bearing in mind the exemptions and tax holidays claimed by such companies in the past. There is a need to consider the impact of possible loss of MAT credit, which otherwise would have been available for the future.


Additionally, the move to offer reduced corporate tax rate of 15 per cent to Indian manufacturing companies to be set up post October 1, 2019, is to provide impetus to the Make in India initiative. This change is an attempt towards making India a promising destination for global corporates, planning to set up their manufacturing plants or expand their existing capacity. With this revised rate, India is now extremely competitive when compared with Asean.


The other change effected to afford stability in the capital markets include the removal of recently enhanced surcharge on capital gains earned by entities other than companies, including individuals and trusts, on sale of equity shares or units of equity orient fund and on capital gains arising on sale of securities by foreign portfolio investors.


Buyback tax was introduced for listed companies by the Union Budget with a view to remove the opportunities for tax arbitrage and create a level playing field for listed and unlisted companies. However, this change was observed to have negatively impacted listed companies that had already announced their buyback plans before the applicability of the tax to such companies but were to finally consummate the buyback post the change in the law. Given this, the decision to remove the applicability of buyback tax on listed companies that have already announced their buyback plans publicly before July 5, 2019, is welcoming.


The expansion of scope with respect to mandatory spending by companies on corporate social responsibility initiatives will now culminate into higher spending on research activities.


All in all, it remains to be seen how the above changes, in conjunction with other measures announced in the recent past by the finance minister, will revive the economy. Notwithstanding that, the philosophy to move forward with lower tax rates coupled with no exemption/deduction is directionally correct and will help simplify the law and its administration and reduce litigation.


The writer is partner and leader corporate & international tax, PwC India


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