Indian companies have a reason to be happy. In a significant move, Finance Minister Arun Jaitley said he would bring the corporation tax rate on a par with China, by lowering it to 25 per cent from 30 per cent, over the next four years. But the catch is, the various exemptions provided to companies will be removed and the corporation tax rate cut will take effect from 2016-17. Till then, the effective tax rate on Indian companies will be marginally higher, at 34.61 per cent, compared with 33.99 per cent at present, because of an increase in surcharge proposed in the Budget.
Jaitley clarified corporation tax would be brought down in phases, so that Indian companies could gear up to compete with companies based in the Asean region, where the rate is 21.9 per cent. He said the various exemptions for companies would be phased out, so that tax litigation could be bought down. With Make in India a key theme for the government, experts say the rate reduction plan will help companies plan their investments in India and eliminate the yearly surprises from the Budget. This is a big positive for those like Reliance Industries, Tata Steel and the Birlas UltraTech, which are building new capacities in India. (Make in India: Making it happen).
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A road map for a futuristic tax regime of lower corporation tax rate and phasing out of exemptions heralds an era of a transparent tax regime of no surprises, says Girish Vanvari, national head of tax, KPMG in India.
There was more good news for Indian companies: The goods and services tax will be rolled out from April 1 next year and the general anti-avoidance rules (GAAR) have been deferred by two years. According to GAAR, which was to earlier come into effect from April 1 this year, tax authorities could deny tax benefit to any arrangement entered into primarily for avoiding tax. The FM has grandfathered all investments to be made up to April 1, 2017, from GAAR; that is a pleasant surprise, says Rajesh Gandhi, partner, Deloitte Haskins & Sells LLP.
India Inc chief executives say goods and services tax (GST) will create a pan-Indian common market and eliminate the cascading effect of taxes on indigenous manufacture of goods and services. To get ready for GST, the service tax rate was increased from 12.36 per cent to 14 per cent by the finance minister, and the negative list of services was pruned. Education cess was integrated in the excise and service tax rates. In the process, all services are to become more expensive.
Apart from tax rationalisation, the finance minister announced the governments intent to spend a massive Rs 70,000 crore for building Indias infrastructure, investing in construction of 100,000 km of roads, five new plug & play ultra mega power projects (UMPPs) and conversion of port trusts into companies, to help them raise resources. The corporatisation of ports will help big port trusts like Mumbai Port Trust and JNPT, situated off Mumbai Bay, to raise funds at an attractive rate and make use of land bank.
The National Investment and Infrastructure Fund (NIIF), with a corpus of Rs 20,000 crore, will help local infra companies raise resources by investing in infrastructure special-purpose vehicles. This will create demand for construction, cement and capital goods firms, so far bearing the brunt of slowing economy. Besides introduction of tax-free bonds and moving from obtaining the multiple permission regime to working with the pre-existing regulatory mechanisms will be a relief for infra companies.
Ketan Dalal, senior tax partner, PwC India, however, is not happy with the reduction in minimum alternate tax (MAT) and dividend distribution tax rates, both at 20 per cent. However, a reduction in withholding tax on royalty, from 25 per cent to 10 per cent, is an excellent move for Indian companies, including from a Make in India perspective, Dalal says.
For multinationals, tax experts say, there have been long-drawn litigation in terms of applicability of MAT. The proposed amendment in the I-T Act has given partial relief to foreign stakeholders as foreign institutional investors (FIIs) have been excluded from the purview of MAT applicability on capital gains in India. However, as no clarity has been provided on MAT applicability to other foreign firms, the ongoing litigation shall continue and partial address of the issue is seen as a dampener to attracting new foreign equity players, says tax expert, Suresh Surana.