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The intent of the Narendra Modi-led Government to revive India Inc’s investment cycle and, thereby, spur growth was evident from the proposals spelt out in its maiden Budget. The decision to lower the expenditure threshold for investment allowance from the earlier ₹100 crore to ₹25 crore can motivate smaller companies in the manufacturing space to resume expansion projects. Under the scheme, 15 per cent of the total capex spend by manufacturing companies is tax deductible. For instance, if a company spends ₹100 crore to set up a new plant or revamp its existing plant, ₹15 crore is deductible from the total taxable income. This is over and above the depreciation benefit that company enjoys on the new asset.
This will not only benefit companies with big expansion plans but will also drive growth for equipment manufacturers. The benefit will be available for expansion projects undertaken over the next three years (up to March 31, 2017). Even as large companies with large expansion plans, such as Ultra Tech Cements, Apollo Tyres and Cipla, will profit from this move, the benefit may be more pronounced in small and mid-sized companies.
Other positive moves for India Inc include continuation of concessional tax of 15 per cent on dividend received from their foreign subsidiaries. This may continue to benefit companies with profitable overseas operations. The proposal to extend the advance ruling (only available to foreign companies until recently) to Indian companies is yet another positive. This will provide better clarity on the tax liability and, thereby, save time and money for Indian companies on tax litigations. However, effective implementation of the proposal will require investment in infrastructure, such as adequate advance ruling benches and manpower to handle the cases.
But the Government’s decision to charge dividend distribution tax on the gross dividend payable by companies and mutual fund houses has come as a dampener. The tax burden on dividend distributed by India Inc on account of this proposal is likely to increase by about 2.5 percentage points from the current 16.9 per cent (including surcharge and cess). This may not materially impact India Inc, but may reduce the quantum of dividend likely to be paid to investors.
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