Budget 2022

Tax relief for SMEs

Rajalakshmi Nirmal | Updated on: Jan 12, 2018

The Change

India Inc was pinning its hopes on a substantial reduction in corporate tax, but, the Finance Minister chose to dole out the bounty selectively for smaller companies. For medium and small enterprises with an annual turnover of ₹50 crore or less, the corporate tax rate has been reduced to 25 per cent from 30 per cent. This implies that if a company’s profit is less than ₹1 crore, the effective tax rate works out to 25.75 per cent (including cess, surcharge doesn’t apply to them). This move will boost the growth of MSME companies.

The Finance Minister, however, didn’t heed to the request of lowering MAT – the minimum alternate tax. Thus, SEZ developers, infrastructure and cement companies (Gujarat Pipavav Ports, IRB Infrastructure Developers, The Ramco Cement, India Cements), having units in specified locations in the North-East, and export companies (including IT companies that have units in SEZs) will continue to cough up a basic tax rate of 18.5 per cent under MAT (which works out to an effective 21.34 per cent if income is above ₹10 crore).

Also, the tax burden for companies that operate cold chain facilities — including Snowman Logistics, Adani Fresh and Container Corporation — and pharma companies that invest in R&D will go up as they will see reduced benefit from the various deductions available from April.

The Background

In 2015, the CBDT laid a roadmap to reduce corporate tax and phase out exemptions to plug leakages in the system.

In 2013-14, the effective tax rate for corporates worked out to 23.22 per cent compared to the average statutory rate of 33.2 per cent.

In the 2014-15 Budget, the Finance Minister said that the corporate tax rate would be reduced from 30 per cent to 25 per cent over a period of time, accompanied by removal of various exemptions.

He did this partially in the 2015-16 Budget by capping benefits under accelerated depreciation, setting the sunset date for commencement of operations for SEZ and infrastructure developers as April 1, 2017, and reducing deductions available under a few other heads starting April 2017.

On the tax front, the rate was cut to 29 per cent (plus surcharge and cess) for companies with turnover of not more than ₹5 crore (now these companies will also pay 25 per cent tax).

Further all new manufacturing companies incorporated after March 1, 2016, were given an option to be taxed at 25 per cent (plus surcharge and tax) provided they did not claim any tax exemptions.

The Verdict

Reducing tax rate only for small companies is a well-thought-out move, given the pressure these companies face in the manufacturing and service sector.

Also, the removal of tax exemptions that begin from this April will benefit the exchequer only in the next seven or 10 years.

Published on February 01, 2017
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