Skyrocketing for large corporations to cut corporate tax to 25%
The path to extending the corporate tax rate cut to 25% for large corporations could become difficult, with revenue foregone due to tax incentives and exemptions growing at a rapid pace.
Revenue foregone due to corporate tax exemptions is expected to rise 16% in 2018-19 (FY19), from 8.7% the year before and 12% in 2016-17, according to budget documents.
The Income Tax (IR) Law provides tax incentives in the form of tax benefits for entities involved in exports, establishment of infrastructure, scientific research and development, rural development, etc. These incentives have a significant impact on revenue collection. The projected revenue shortfall due to tax incentives is over Rs 1.08 trillion for FY 2019 from Rs 93,643 crore in the previous year.
Although the government has been phasing out these exemptions, new ones have been introduced in the past two years to strengthen a few areas.
For example, the 2019-2020 (FY20) budget introduced a profit-related deduction for units established under the International Financial Services Center near Gujarat International Finance Tec-City (GIFT-City), Ahmedabad.
To promote electric vehicles, manufacturers of components, such as solar electric charging infrastructure and lithium storage batteries and other components, have been offered investment-related IT exemptions. Similarly, in fiscal year 2019, incentives were offered to encourage start-ups.
In fact, the actual revenue shortfall has proven to be greater than the projected revenue over the past few years. For example, the government had forecast a drop in lost revenue of 1.29% in 2017-2018 (fiscal year 2018), but instead saw a growth of 8.6%. In the prior year period, he expected lost revenue to increase by 8.5%, when it actually increased by 12%.
As a percentage of corporate tax recovery, the shortfall for fiscal 2019 is expected to be the same as the prior year at 16.3%.
However, in a double whammy for large corporations, although the corporate tax rate has been kept at 30%, exemptions are slowly being phased out, increasing their effective tax rate.
The largest companies in India (in the sample studied in the budget), whose pre-tax profit (PBT) is above Rs 500 crore, the effective tax rate on them fell from 22.9% in 2014- 15 to 26.3% in FY18. For smaller companies with a PBT of less than Rs 1 crore, the effective tax fell from 29.4% to 26.4% over the same period.
Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, said: “Several exemptions available to businesses have been withdrawn from time to time in lieu of the supposed reduction in corporate tax rates. Consequently, this has affected large companies with a turnover of more than Rs 400 crore for which the hitherto available exemptions are removed and corporate tax rates have also not been reduced.
Rakesh Nangia, Managing Partner, Nangia Advisers LLP, said: “The lower corporate tax rate, coupled with the phasing out of incentives, will ensure that the Indian corporate sector benefits from reduced rates/tax incentives evenly, without affecting government revenue targets. .”
Former finance minister Arun Jaitley had promised a cut in the corporate tax rate to 25% by FY2020. In the latest budget for FY2020, the government extended the lower tax rate 25% to companies whose turnover does not exceed 400 crore rupees, which should affect the public treasury by 4,000 crore rupees. On Tuesday, Union Finance Minister Nirmala Sitharaman said the corporate tax rate would soon be cut for everyone.
Extending it to companies with turnover above Rs 500 crore, which make up less than 1% of the corporate universe but account for 41% of the government’s corporate tax catch-up, would be the real test.
As part of the roadmap, the government had announced that existing tax exemptions with sunset provisions would continue without further extension; those without a sunset clause will have a uniform sunset clause from March 2017, in addition to a rollback of all weighted deductions from April 2017.