The government’s decision to slash corporate tax rates for existing domestic companies as well as new manufacturing entities companies set up between October 1, 2019 and March 31, 2023 is a welcome step seen as an early Diwali for India Inc, which will lower the tax outgo and improve profitability.
Analysts point out that with the phasing out several tax exemptions, the effective tax rates for companies were already on the rise even though corporate tax had been brought down. Nearly 90 per cent of the existing domestic firms are expected to benefit from the lower rates and will also improve their profit after tax by three per cent to nine per cent depending on their tax bracket. However, the rates do not include a dividend distribution tax of 15 per cent paid by firms.
Friday’s announcement by Finance Minister Nirmala Sitharaman has now lowered the effective tax rate for domestic companies to 25.17, provided they do not take any incentives. For new manufacturing firms, the effective tax rate will be 17.01 per cent inclusive of surcharge and cess.
“This is a welcome move as it makes India’s corporate tax rates competitive vis-à-vis South East Asian countries like Vietnam and Myanmar where rates are in the range of 15 per cent to 20 per cent. A lot of exemptions are getting phased out, and effective tax rates are increasing, so the new rates will benefit all companies across the board,” said Amit Maheshwari, Partner, Ashok Maheshwary and Associates, adding that DDT will still have to be paid by companies over the effective tax rate.
The lower rate of 15 per cent is also targeted specifically at new manufacturing firms and will not be available for limited liability partnerships, proprietorships, etc. he also pointed out.
Read more: Government slashes taxes for corporate, new manufacturing firms
Ameet Patel, Chairman, Taxation, Bombay, Chartered Accountants’ Society said that the tax rate will substantially go down for 80 per cent to 90 per cent of companies to an effective rate of 25.17 per cent as very few companies take the exemptions. Even for firms that choose to take the exemptions, the minimum alternate rate is now down to 15 per cent, he noted.
Experts also pointed out that at present, a company with an annual turnover of ₹400 crore has an effective tax rate of about 34 per cent (inclusive of cess and surcharge). This has been brought down by nearly 9 per cent in the proposed regime. Profit after tax will accordingly improve.
“This fulfils the government’s promise of an effective tax rate of 25 per cent for all companies and focusses on making India as a global manufacturing hub,” said Vishal Anand, Partner, Corporate and International Tax, PwC.
According to the Union Budget documents, the effective tax rates in 2017-18 for all companies remained higher than 26 per cent. It peaked at 29.09 per cent for companies with a profit before tax of ₹10 crore to ₹50 crore and was at 28.62 per cent for firms with PBT between ₹100 crore and ₹500 crore.
In 2017-18, the effective tax rate for automakers was about 30.46 per cent while the manufacture of electrical machinery and apparatus was 26.82 per cent. For manufacturing firms, the effective tax rate was 27.83 per cent in 2018-19.