Elusive relief

One of the key expectations of the corporate India from budget 2017 was across the board reduction in tax rates and rationalisation of levy of surcharge and cess.

This was accentuated by the assurance of the finance minister in his previous Budget and was also perceived as timely, given the global war for investment and consequent tax sops being offered across most major economies.

Taking a look at the receipts budget 2017-18 presented on February 1, the effective tax rate for corporate India has gone up to 28.24 per cent (if dividend distribution tax included since in most countries it is not creditable, the effective tax rate goes up to 31.33 per cent).

Seen on a year-on-year basis, the effective tax rate for corporate India has gone up to 360 basis points in just one year (24.67 per cent reported in the budget 2016).

It is anticipated that there would be further increase in effective tax rate for corporates in FY 18 for the following reasons:

With the surge in bank deposits, corporates would now be eligible to invest in adding capacity at a lower cost, however, the investment allowance of 15 per cent on cost of new plant or machinery (above ₹250 million) made up to 31 March 2017 under Sec. 32AC available hitherto would now not be available

Highest rate of tax depreciation capped at 40 per cent on actual cost/written down value as against earlier norm, which permitted a higher deduction of 60-100 per cent rates

Special Economic Zone (SEZ) Unit tax holiday deduction linked to taxpayer’s total income as against undertaking specific deduction, which would limit loss carry forward and curtail benefits

Interest limitation rules now being prescribed on payment of interest above ₹10 million to associate enterprises in prescribed situations as part of Base Erosion and Profit Sharing (BEPS) — Action plan 4 recommendations.

Also, with the tapering effect of profit linked incentives such as scientific research deductions for specific business being curtailed and with CSR contributions being tax inadmissible, corporate India would have to run its numbers to see the effective tax rate and cash tax for FY 18.

In sum, it would help if the finance minister clarifies the position and timing on reduction in tax rates for large tax payers and until then, given the commitment to reforms, possibly remove surcharge/cess and restore investment allowance and deductibility for CSR contributions — both of which go hand in hand with the theme of this Budget!

The writer is Partner-Direct Tax at PwC. With inputs from Lakshmi Sankar, Manager-Direct Tax. The views are personal

COMMENT NOW