In the Union Budget 2015 speech, the Hon’ble Finance Minister, Mr Arun Jaitley, has announced the intention to reduce the corporate tax rate from 30% to 25% over the period of next four years, accompanied by the removal of tax incentives and deductions. Following this, in November 2015, CBDT released the first roadmap of the phasing out plan to simplify tax administration and bring transparency.
In today’s competitive economy, a country’s tax structure is an important factor for investors to decide where to pool in their money. Accepting this, many countries, recently, have moved towards building their tax regime to be more competitive. The ruling government’s proposal of phasing out the tax incentives and reducing the corporate tax rate seems to be a move on similar lines to improve India’s competitiveness.
Let’s look at the current scenario
At present, the effective corporate tax rate in India is 34.608% which makes other emerging economies viz China, Indonesia, Brazil and South Africa more attractive for investors where the corporate tax rate lie between 15% to 28% from an income-tax perspective.
Nonetheless, to compensate, the Indian government, inter alia, offer a number of tax incentives in terms of weighted deductions, allowances, etc, to high priority sectors. For example – pharmaceutical industry, companies engaged in generation and distribution of power, information technology sector. These incentives and exemptions are prone to misuse and lead to litigation.
In summary, India is perceived to be a high tax cost jurisdiction but the government did not benefit in terms of fiscal revenue due to numerous tax incentives and ended up losing out on both the counts.
In the recently released plan, the government is proposing to phase-out the incentives and deductions for both corporate and non-corporate tax payers. The tax incentives having a sunset date will not be extended and similarly, for incentives with no terminal dates, the government has proposed a sunset date of 31 March 2017. Further, the government is also planning to take away the benefits of weighted deductions with effect from 1 April 2017.
Consequently, in the no incentive era, corporates which are benefited by these incentives would stand to lose; however, they are hoping to compensate the same by the reduced corporate tax rates.
The watch list
What needs to be seen is the manner in which the promised tax rate reduction will take place. Mr Jaitley has promised to bring down the tax rate to 25% and the reduction process to start from the next year. Though, it is a happy news for the business community, however, the move will have an adverse impact, at least in the short and medium term, on the corporates currently enjoying the tax incentives given that they stand to lose significant benefits. It may also discourage investment in short run in the highly benefited areas by the current tax incentives.
The wish list
The deal of reduced corporate tax rate at the cost of available tax incentives should be a good buyout for the corporates. As long as it does not cost any additional penny, the corporates will welcome the phasing out proposal.
Further, currently, most of the corporates which are availing the tax incentives are covered under the MAT regime; however, the ‘no tax incentive’ era may raise a question mark on the same as the reduced corporate tax rate and MAT rate will come closer. The redundancy of MAT and the objective of simplification of tax laws may lead to an additional mission – ‘Phasing out of MAT’ for the government to accomplish.
The clouds of doubts will be clear once the government reveals the detailed phasing out plan. The sooner the better will be welcomed by the business community and the corporates to plan their projects in accordance with the expected tax regime.
Well, for the phasing out deal to be a success, the government should not play the retro game (bringing the provisions from retrospective effect) and the projects that are already set up should not be affected.
Hopefully, reducing the corporate tax rates and bringing a systematic taxation approach helps India in climbing up the ‘Ease of doing business’ score.