Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.

Policy

11,341.1536.1
Stock Analysis, IPO, Mutual Funds, Bonds & More

Why Corporate India must start investing now

Industry is relieved as the cut in corporate tax rate will leave more money in the hands of corporates, spur investment and expansion.

, ET Bureau|
Updated: Sep 20, 2019, 07.32 PM IST
0Comments
BCCL
Nirmala-Sitharaman=bccl
Given that almost 50% of the companies continue to report losses year after year, it was reckoned that MAT will create an incentive to improve corporate performance and accurate reporting thereof.
Three years ago, industry lobby the Confederation of Indian Industry sought a cut in India’s corporate tax rate to be cut from 30% to 18%, while scrapping all tax breaks. The NDA government, on its part, had promised to lower the rate to 25%, but that was done in dribs and drabs, which upset Corporate India.

A steep cut in the nominal rate, while scrapping all tax breaks, is what India needed for a host of reasons: to give an incentive for companies to invest, improve compliance and revenue collections. Better late than never as the cliche goes.

Our existing tax rate (of about 34%) is way too high compared to China at 25%, with a 10 to 20% rate for small scale enterprises. US offers 21%rate while it is even lower in Singapore at 17%.

Stagnating investments make the case for a cut in corporate tax rate compelling”, said the yet to be released Task Force on Direct Taxes steered by former Member Central Board of Direct Taxes Arbind Modi.

Presumably, the final report of the Direct Tax Code chaired by Modi’s successor Akhilesh Rajan pitched for lowering the rate to revive investments in the economy when growth is sputtering. Ideally, the government should have released the report in public domain.

Instead, it chose to announce a steep cut in the corporate tax rate – a big booster shot for the economy -- that took the industry and the markets by surprise.

The key highlights: Domestic firms can pay 22% corporate tax if they give up exemptions, and their effective tax rate would be 25.17% inclusive of cesses and surcharges. They would not have to pay the minimum alternate tax, originally introduced to bring zero tax companies under the net. The surcharge on capital gains tax would also go to give a fillip to the stock markets and lower the tax burden for retail investors and trusts that invest in listed equities.

Industry is relieved as the cut in corporate tax rate will leave more money in the hands of corporates, spur investment and expansion at a time when banks, saddled with non performing assets, are reluctant to lend to companies.

These measures are certainly bold: the RBI Governor Shaktikanta Das said so explicitly. In hindsight, should’nt the government have gone ahead with the in this year’s Budget? But it will now issue an Ordinance to make changes in the income tax law that has to be later on approved by Parliament. Surely, Ordinance is not the best route to change laws that need to be debated in Parliament.

What is welcome though is the decision to do away with exemptions of any kind. Arbind Modis report offers useful insights: For many decades, the tax base has been eroded through a steadily escalating range of exemptions. India drew a programme in 1985 to phase out tax incentives. In 1990, most business-related tax incentives were withdrawn along-with a cut in the corporate tax rate. However, soon thereafter, in the wake of liberalization, many of those incentives found their way back in the statute.

After the enactment of the FRBM Act, 2003, there was growing support for phasing out the various tax incentives. Finally, in 2016, the government announced a program for grandfathering of all business related tax incentives alongwith a cut in the corporate tax rate. With this, the exercise to broaden the corporate tax base seems to have been completed. The full impact in terms of revenue will be felt only after 2027. Simply put, most exemptions have already been grandfathered.

The Modi panel debated the pros and cons of the minimum alternate tax .

"The case for MAT is based on the twin consideration of combating tax avoidance and tax evasion. Over years, the Income-tax Act has been enshrined with several tax incentives which have been misused to erode the tax base. Corrective measures were adopted in the Union Budget 2016.

Across the world, effective mechanisms have been put in place to deal with the problem of base erosion and profit shifting (BEPS). Regardless of this, several lacunae prevail; it is impossible for any administration to foretell all cases of misuse given the new and innovative business models. MAT is an effective instrument in dealing with tax evasion since it caps the benefits flowing from evasion by placing a floor on tax payable” said the report.

Apparently, some members in the Task Force questioned the need to continue with MAT following the grandfathering of tax incentives and the spate of litigation arising from the implementation of the existing MAT provisions. The counter argument was that the purpose of MAT was to prevent erosion of the tax base due to both tax avoidance and tax evasion.

Given that almost 50% of the companies continue to report losses year after year, it was reckoned that MAT will create an incentive to improve corporate performance and accurate reporting thereof. More importantly, it will facilitate the smooth transitioning to a new tax regime without jeopardising the flow of tax revenues. Further, if we were to accept the argument that MAT would be redundant with the elimination of tax incentives, the existence of MAT on the statute will be harmless to the taxpayer but provide a protection against the downside risk of revenues particularly till such time the new law stabilises. Therefore, the case against MAT is extremely weak, the panel said.

The government has kept MAT in the statute and reduced the rate to 15% for companies that continue to pay the existing rate of corporate tax. That is sensible.

Also Read

Corporate India’s tax burden may come down by 18%

Corporate tax cut infuses fresh energy into corporate India: policy makers

World Cup: A field trip for corporate India

At only 3%, Corporate India is still struggling to bring women to the top

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service