Comments
Indian Information Technology companies will not see major gains from the Centre’s decision to cut corporate tax. IT service companies already enjoy tax exemptions under Section 10AA of the Income Tax Act for revenues from special economic zones (SEZs).
The tax exemption varies from 100 per cent of profits for the first five years of operations to 50 per cent for the next five, and 50 per cent for a further five years depending on investment of the tax benefits back into business.
SEZ profits
“Benefit in FY2020E will be modest to negligible since many avail of tax exemption on SEZ profits in India. However, the benefits will be material in the medium term once the SEZ benefit fades away. The companies that could potentially benefit in the near term are Infosys and Wipro, while the tax rate will remain largely unchanged for TCS and Mindtree,” said a report from Kotak Institutional Equities Research.
The government has cut the effective tax rate for domestic companies to 25.6 per cent from 34.9 per cent earlier.
These companies will not be able to avail any tax exemptions if they avail the lower tax rate, while companies currently availing exemptions can opt to pay the new (lower) tax rates once the exemption periods end.
“Companies have to decide whether taxes paid in India are less than or more than the revised effective tax rate, if it is the latter they may forego the current SEZ exemptions and transition to new (lower) corporate tax rate in India Beneficiaries — all in the medium term,” said Kotak.
Industry body Nasscom had in the Budget recommendations sought continuity of SEZ tax holiday by removing the sunset clause.
It was also highlighted that the benefit of reduced corporate tax rate of 25 per cent was not available to many companies operating in the IT/ITES sectors that did not meet the revenue threshold.
While the SEZ sunset clause has not been extended, companies claiming tax holidays, whose Effective Tax Rate (ETR) (after claiming tax holidays) is higher than the peak 25.17 per cent can now choose to give up the tax holiday claims and opt for the new tax rate.
Nasscom said in a statement, “Moreover, companies continuing to claim tax holidays and not opting for the switch have a reduced MAT rate of 17.47 per cent (as against the earlier 21.55 per cent). This also helps in reducing the cash tax outgo.”
It said, “Further, for IT companies incorporated after October 1, 2019 proposing fresh investments in the hardware/fab sector (commencing manufacture before March 31, 2023), may be benefitted by the new incentivised corporate tax rate of 17.01 per cent.”
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.