Corporate tax Cut: The government is estimating a hit of around Rs 1 lakh crore due to a reduction in corporation tax, against Rs 1.45 lakh crore calculated when the move was announced in September. The official said this estimate was based on an analysis of advance tax payments and will provide a much-needed cushion to the Centre, which is battling an acute fiscal strain, with tax collections expected to be significantly lower than the budget estimate of Rs 24.6 lakh crore on a gross basis.
During the current year, corporation tax collections were estimated at a little under Rs 7.7 lakh crore. For existing companies, the base corporation tax rate has been reduced from 30% to 22%, while new manufacturing companies will only face a 15% levy if they are incorporated after October 1, 2019, and commence operations before March 31, 2023.
The decision, however, came with the rider that companies will have to give up on exemptions if they want to opt for the lower rate. Tax consultants pointed out that several companies are yet to decide on whether to move to a 22% levy or continue with the existing mechanism as the effective rate works out to be much lower.
Profitable banks and FMCG companies will find it beneficial to move to the new rate as there is an immediate benefit but infrastructure or some of the companies engaged in exports may continue because the effective rate is lower (currently),” said Sudhir Kapadia, who leads the tax practice at consulting firm EY. He said companies that pay minimum alternate tax (MAT) have credit lying on their books, which is holding them back from shifting to the new system as they stand to lose.
For IT-enabled services and many other service companies, the gain may be significant, prompting them to shift to the new regime, added Rahul Garg, partner and tax technology leader at Price water house Coopers India. “Some of the taxpayers for whom the exemptions have expired or are expiring may avail of this (the new structure),” he told TOI. While most consultants are unwilling to give out numbers, Neeru Ahuja, a tax partner at Deloitte India said out of a sample of 100 companies, over half have shifted to the new regime, while around one-tenth are undecided.
An important consideration for many has been the possibility of claiming higher dividends. “Many companies have opted for the new scheme of lower corporate tax on further accounting analysis and impact. Opting for a lower rate has also allowed some companies to write-back excess provisions of deferred taxes, which in turn helps the company is having a better bottom line and profits,” she said. EY’s Kapadia said that some of the companies will decide on a changeover in the coming months.
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