Budget countdown: India Inc expects less tax outgo

In the 2015 Budget, Finance Minister Arun Jaitley had announced that corporate tax would be reduced from 30 per cent to 25 per cent over a four-year period and various exemptions and deductions would be simultaneously phased out. This was intended to plug tax leakages. 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. Also, much of the tax burden was on small companies — companies making profit under ₹1 crore. The effective tax rate on these companies was 26.89 per cent while those making profit of more than ₹500 crore paid tax at the rate of 20.68 per cent.

In the 2016 Budget, the Finance Minister removed some tax incentives. The benefit from accelerated depreciation was capped at a maximum of 40 per cent (with effect from April 1, 2017). The act earlier provided for depreciation up to 100 per cent for certain assets. For incentives under section 80-IAB, 80-IA and 80-IB enjoyed by infrastructure and SEZ developers, the sunset date for commencement of operations was set at April 1, 2017. It also stated that units in SEZs commencing production after April 1, 2020, cannot claim any deduction. The investment-linked deduction of 150 per cent available for cold chain facilities and warehouses was reduced to 100 per cent with effect from April 1, 2017. On scientific research, the deduction available was reduced to 150 per cent from 2017-18 and 100 per cent from 2020-21; down from 200 per cent earlier.

The removal of tax exemptions would impact some companies such as Container Corporation of India, Gateway Distriparks, Adani Ports and Special Economic Zone, and Gujarat Pipavav Port that claim benefits under section 80IA. However, the Finance Minister also reduced the tax rate for some segments last year. For companies making profit of not more than ₹5 crore (for financial year ending March 2015), the tax rate was reduced to 29 per cent (plus surcharge and cess). The effective tax rate for these companies thus reduced to 31.96 per cent from 33.06 per cent. Further, the Finance Minister also announced that all new manufacturing companies incorporated after March 1, 2016, will be given an option to be taxed at 25 per cent (plus surcharge and tax) provided they do not claim any exemptions — either profit linked or tax linked or related to investment allowance or accelerated depreciation — bringing their effective tax rate to 28.84 per cent from 34.60 per cent (where income exceeds ₹10 crore and the applicable surcharge rate is 12 per cent).

In this year’s Budget, India Inc may see further cuts in tax rates. While Assocham wants the corporate tax rate to be brought down to 25 per cent, CII has asked for a reduction to 18 per cent inclusive of the surcharge and cess. The latter has said that the government can remove all incentives available to corporates, if it helps bring down the headline tax rate.

A drastic cut in the corporate tax rate is, however, unlikely given the pressure on the Centre to stick to the FRBM target. However, as per the roadmap already laid out, the Centre may reduce the corporate tax rate by a few percentage points this Budget.

Companies that cough up a higher tax of 30 per cent and above include those that make electronics and computer hardware (effective tax rate of 32.05 per cent), manufacturers of marble and granite (32.77 per cent), rubber producers (32.25 per cent), nursing homes, advertisement agencies, beauty parlours, banks, travel agents, speciality hospitals, film distributors and television channels. These will be beneficiaries of a cut in corporate tax rate.

Companies that are under MAT (minimum alternate tax) net may also benefit. MAT is a tax levied on those entities that do not pay income tax despite making healthy profits because of the various incentives available under the Income Tax Act. The basic MAT rate is 18.5 per cent and inclusive of surcharge and education cess this comes to 21.34 per cent (if income is above Rs 10 crore).

Given that the effective corporate tax rate is itself only 24.67 per cent (in 2014-15), the current MAT rate looks high. And, now that the government wants to reduce corporate tax, it is only logical that MAT rate is also cut. SEZ developers, infrastructure and cement companies (Gujarat Pipavav Ports, IRB Infrastructure Developers, The Ramco Cement, India Cements), companies having units in specified locations in the North-East region, and export companies (including IT companies that have units in SEZs) are the ones that pay MAT and may see reduced tax outgo if the tax rate is reduced.

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