New Delhi: Finance Minister Arun Jaitley on Monday began the process of phasing out corporate tax exemptions but restricted the marginal reduction in corporate tax rates only to small companies.
In his budget speech, Jaitley said benefits of phasing out corporate tax exemptions will be available to the government only gradually, thereby justifying not lowering the tax rates for big companies this year.
Jaitley lowered the corporate tax rate for companies with a turnover of ₹ 5 crore or less to 29% plus surcharge and cess from 30% plus surcharge and cess. He also announced a corporate tax rate of 25% for all new manufacturing companies incorporated from 1 April, provided they do not claim any exemptions.
The exemptions that are proposed to be phased out in the budget include accelerated depreciation and benefits available to special economic zones.
In last year’s budget, Jaitley announced the government’s intention to phase out corporate tax exemptions gradually while simultaneously bringing down corporate tax to 25% from the prevalent 30% over four years.
Subsequently, the government put out a draft roadmap that sought to rationalize exemptions such as those given to aid scientific expenditure, capital expenditure and the benefits of accelerated depreciation—mainly benefitting sectors like infrastructure and information technology and those who undertake research and development activities in India.
At present, India gives tax holidays to various sectors including power generation, distribution and transmission, special economic zones and telecom as well as for manufacturing units set up in the North-East and some special category states like Jammu and Kashmir and Himachal Pradesh.
Phasing out of exemptions will reduce litigation and make Indian companies more competitive globally, while taking up government revenues over the years as effective tax rates go up.
At present, the effective tax rate is only around 23% as against the statutory rate of 32-33%, as per the revenue foregone statement of the 2015-16 budget documents. According to the statement, the revenue foregone as a result of these exemptions stood at more than ₹ 62,000 crore.
In addition, effective tax rate of companies reporting a profit before tax of ₹ 500 crore is much lower than the effective tax rate of small units whose profit before tax is ₹ 1 crore or less, reflecting distortions in the current taxation system where tax benefits are reaped by big companies earning large profits rather than small and medium units.