The despondency in the economic scenario visible over the last few months needed the Government to take steps which were not incremental in nature but are transformational. The Finance Minister deserves kudos for having come up with a set of changes to the rates of income-tax which are radical and which should provide a booster dose to the economy. More important, these make us competitive in the global market and are, to an extent, like the radical US Tax Reforms.
For starters, it was the demand of the industry that this Government having provided sunset to the incentives honours its commitment to lower the rate of tax from 30 per cent to 25 per cent. The Ordinance passed today goes a step further and caps the rate of tax of corporates who do not avail of any incentives to 25.17 per cent, inclusive of surcharge. Such companies would have no MAT liability. For existing companies which are availing and would like to continue to avail tax incentives, the rate of tax will continue to be 30 per cent / 25 per cent (depending on the turnover). However, their MAT liability would go down from 18.50 per cent to 15 per cent. Where a company opts for the lower tax regime by giving up incentives, the past losses relatable to such incentives would lapse.
Finally, new companies set up to undertake manufacturing activities would be subjected to a tax at the rate of 15 per cent plus surcharge i.e. an effective rate of tax of 17.16 per cent. As we look at the rates of tax in the ASEAN or in other emerging economies, this is possibly one of the most competitive rates of tax. As India looks to incentivizing US MNCs to shift their manufacturing base from China to India, the proposed rate of tax would be a true attraction.
One very interesting question arising out of these changes is that if an existing company moves from its current regime of availing exemptions and opts to be covered by the new regime of 25.1 per cent tax rate, what happens to its accumulated MAT credit? The availability of such credit appears unlikely. There are companies who have a significant MAT credit sitting in their accounts and they may face a potential write-off if these credits cannot be absorbed in the future. As such, deciding on whether or not to opt for the new tax regime would be an involved question.
The provisions relating to non-levy of increased surcharge on income arising by way of capital gains where STT is paid formalizes the announcements already made earlier. These are welcome. One would have wished that the increased surcharge was done away altogether. How equitable is it to tax hard earned income at a higher surcharge and capital gains at a lower surcharge merely to promote investments on the stock exchange and to promote FPI fund flows? The provisions relating to availing buyback tax of listed companies only to announcements made from July 6, 2019 is indeed sensible. The earlier provisions had made the levy retrospective.
A few issues need further consideration. Why leave LLPs out of the new tax regime? Do we not need to look at the rate of Dividend Distribution Tax? The process of reforms is a continuing one and the next set of announcements will hopefully deal with these issues.
Dinesh Kanabar, CEO, Dhruva Advisors