Budget 2019

Corporate Tax: Relief to small enterprises

Rajalakshmi NirmalBL Research Bureau | Updated on July 05, 2019 Published on July 05, 2019

Lower the better: Though the incentive is only for companies that do not claim any exemption, it is a big move that brings India on par with peers in Asia and across the globe.

What’s changed?

The Finance Minister Nirmala Sitharaman announced a cut in tax for companies making an annual turnover between Rs 250 and Rs 400 crore to 25 per cent from 30 per cent. The effective tax rate (including surcharge and cess) for these companies (assuming income in excess of Rs 10 crore) has thus come down to 29.12 per cent from 34.94 per cent. However, one move that could impact corporate policies is – the 20 per cent tax on buy backs. To escape dividend distribution tax of 15 per cent which comes to an effective rate of 20 per cent, companies had been resorting to buybacks. But now the Finance Minister has plugged this loophole and announced tax on buybacks at the rate of 20 per cent plus surcharge and cess. In 2018-19, as per official date 60 plus companies did buybacks. This includes large IT companies – TCS, HCL Technologies, Tech Mahindra, and also ONGC, BHEL, Oil India, Coal India and NMDC among others. These large corporates may now consider moving back to declaring dividends in the coming year. The move may impact companies which have buy backs ongoing now.

The background

The NDA government in the last five years has provided relief to SME and MSME companies on the corporate tax front. A screener on companies in the listed space shows that in 2018-19, for companies whose turnover was Rs 250 crore or less, the effective tax rate was 18.2 per cent. In 2013-14, the effective tax rate for companies of this size was 22.9 per cent. However, from the entire universe of profitable companies in the listed space, it appears that the government has been successful in drawing more tax to its kitty – the effective tax rate for all listed companies for 2018-19 was 25.8 per cent. This was 24 per cent in 2013-14. Increase in the effective tax rate is thanks to increase in surcharge on corporate tax in 2015-16. That year, for companies with an income of up to ₹10 crore, surcharge was increased from 5 per cent to 7 per cent and for corporates with income above ₹10 crore, it was increased from 10 per cent to 12 per cent. Also, in 2018 budget, the Finance Minister increased the education cess from 3 per cent to 4 per cent for all companies who were subject to cess. Over the recent years, the number of corporate tax returns filed has also gone up, though not up to the target of Mr Jaitley. Corporate tax collection for 2018-19 was Rs 6.63 lakh crore as per CGA (versus budget estimate of 6.71 lakh crore) – an increase of 16 per cent over 2017-18. It all started with the Union budget of 2015-16, when the then Finance Minister Arun Jaitley mentioned that a process of phased reduction of corporate tax rates from 30% to 25% as well as phased elimination of exemptions will be kick-started. This was intended to plug tax leakages. Also, much of the tax burden was on small companies. Accordingly from 2016-17 while some tax incentives have been reduced for corporates some have been completely removed and the statutory tax rate for smaller enterprises has also been brought down.

Verdict

While tax burden for SMEs is coming down, the big fishes in the market are being made to cough higher taxes as deductions are being phased out. This is a win-win situation for both the government and India Inc.

Key takeaways

Tax cut for companies making turnover of Rs 250-400 crore

Tax of 20 per cent on buyback of listed companies

No relief on MAT

Published on July 05, 2019
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