In a big boost to the small and medium enterprises, the finance minister Arun Jaitley announced a reduction in corporate tax rate from existing 30 per cent to 25 per cent, for companies with turnover of up to Rs 250 crore.
While the finance minister fell short of achieving the roadmap he promised on corporate tax four years ago, he said that the move is aimed towards fulfilment of his promise to reduce corporate tax rate in a phased manner. “I now propose to extend the benefit of this reduced rate of 25 per cent also to companies who have reported turnover up to Rs 250 crore in the financial year 2016-17,” said Jaitley.
While the decision will benefit the entire class of micro, small and medium enterprises that account for almost 99 per cent of companies filing their tax returns, he said that it will lead to an estimated revenue loss of Rs 7,000 crore in the financial year 2018-19. The markets, however, were left disappointed with the announcement as they expected a reduction in corporate tax rates across the board.
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Sudhir Kapadia, national tax leader, EY India said that the expected cut in corporate tax rate to 25 per cent across the board as announced in the roadmap spelled out by the FM four years ago did not materialise. “This has resulted in differing corporate tax rates based on size of a company which may be counterproductive in encouraging businesses to scale up and expand investments and grow.
It is hoped that, in due course, there will be just one harmonised corporate tax rate of 25 per cent and such distinctions based on size be removed,” Kapadia said. Post the announcement, almost 99 per cent of the 7 lakh companies filing returns will fall under the 25 per cent tax slabs and only about 7,000 companies will be in the higher tax slab of 30 per cent as they have turnover of over Rs 250 crore.
“The lower corporate income tax rate for 99 per cent of the companies will leave them with higher investible surplus which in turn will create more jobs,” said Jaitley. There are others who feel that while the Budget has been pro-poor, it is a bit of a missed opportunity when it comes to the investor community and corporates as they did not see much happening on that front.
“One had hoped to see reforms to strengthen dispute prevention mechanisms such as the bolstering of the advance ruling authority mechanism, greater tax sops to boost indigenous manufacturing across sectors and greater relief on the personal tax front, which, in turn would have boosted demand,” said Abhay Sharma, partner, Shardul Amarchand Mangaldas. Last year, the finance minister had announced the reduction of corporate tax rate to 25 for companies whose turnover was less than Rs 50 crore in financial year 2015-16. This benefited 96 per cent of the total companies filing tax returns.
Indian Overseas Bank MD & CEO R Subramaniakumar said the steps taken in the budget should improve credit demand from various sectors of the economy. “Bank credit off take may pick up on cement and construction sector due to the focus on rural housing, rural roads and rural infrastructure spending. Reduction in tax rate to 25 per cent for MSME who have reported turnover of up to Rs 250 crore, will not only create job prospects but also expand their business by additional investments which in turn will increase the demand for credit,” he said.
The Budget will drive consumption helping growth in other related sectors, while the taxation proposals will not dent investors’ appetite for the equity market, FICCI President Rashesh Shah said. “The continuation of STT even while re-introducing LTCG will put some additional burden on the market participants.
This, however, should not impact markets in the long-term. With the markets giving a compounded return of 15-16 per cent over the last 20 years, a tax impacting 1.5 per cent return should not affect the domestic investor appetite for equity investment,” Shah said.