A Slow But Steady Start
The government has allowed global income from royalty or patent that is registered in India at a lower tax rate of 10 per cent to the benefit of companies with intellectual property, which will also help spur local research and development
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In a few years from now, corporate accounting and taxation will not be the same again, and signs have been seeded in Budget 2016. It’s for the first time that an exercise has been undertaken to align tax rates in India to global standards. Tax exemptions will be phased out and give way to a standard 25 per cent tax rate.
While companies were looking forward to the first of the tax cuts, Budget 2016 has disappointed. The reduction in corporate tax of 1 per cent is only allowed for companies with a turnover of Rs 5 crore or less. A vast majority of companies continue to be taxed at the marginal rate of 30 per cent, excluding surcharge. For the capital markets, this means there is going to be no earnings upticks or increase in profitability.
But corporate watchers say that the first of the signs shows the government is treading on the tax cut path, but there was little room to provide lower rates due to fiscal constraints. Revenue secretary Hasmukh Adhia recently said that a one per cent tax cut for corporate was not possible as it would cost Rs 15,000 crore to the exchequer.
But even as tax cuts have been limited to a small cluster of companies, a much larger number of exemptions have been withdrawn in this budget which will impact many companies. Says Frank Dsouza, partner, Direct Tax, PwC India: “In the course of cutting taxes, there will be times when there is more taken or more given. This is one of those times when more exemptions have been taken. But in the end, a start has been made in reducing corporate taxes and that is a positive sign.”
For example, in the current budget, the government has reduced weighted deduction on research and development from 200 per cent to 150 per cent along with a few others, which will raise the tax bill for some corporates such as in the pharma space.
Hence, some companies could see a hit on their net earnings to shareholders depending on where the exemptions have been phased out. But for the large majority of companies, the impact of lower tax is not likely to impact the earnings of shareholders.
Says Dsouza: “I think, however a small step it may be, corporate tax reduction is quite good because he (Finance Minister Arun Jaitley) had to give the confidence that he is sticking to the plan, and so the message is important.”
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1. Startups can avail 100 per cent tax deduction of profits for three out of first five years
2. Corporate income tax rates for turnover not exceeding Rs 5 crore cut to 29 per cent
3. One-time resolution of retrospective tax disputes provides for paying arrears and waiving interest and penalty
1. Cess of 1 per cent levied on luxury cars priced at Rs 10 lakh or more
2. Tax on cigarettes proposed to be hiked by up to 15 per cent will impact cigarette manufacturers
3. Excise duty has been imposed on jewellery manufacturing
4. Infrastructure cess of 1 to 4 per cent imposed on vehicles to combat pollution
5. Tax on coal production increased to Rs 400 per tonne which will impact the coal producers and consumers
For some others, there is good news. The government has allowed global income from royalty or patent that is registered in India at a lower tax rate of 10 per cent to the benefit of companies with intellectual property, which will also help spur local research and development.
It’s probably one of the best years to be a startup. The finance minister has allowed new units incorporated after March 1, 2016 the option of being taxed at 25 per cent, including surcharge and cess, as long as they do not claim exemptions. Besides, the government will also contribute towards provident funds for first three years for new recruits up to a salary of Rs 15000 per month.
Says Sunil Shah, partner, Delloitte, Haskins and Sells: “It’s a positive move by the government as the aim is to boost manufacturing, startups and employment.”
The budget is also trying to address the issue of disputes that so easily creep up between the taxman and the taxpayer. For instance, the budget has also made an offer for corporates facing demands on account of retrospective tax, announcing for those who want to solve the dispute that only the tax needs to be paid, while the interest and penalty will be waived.
On other cases, the budget has offered a window to resolve both direct and indirect tax issues by paying tax and interest in some cases and penalty as well in some other cases. Says Dsouza: “It’s a good move that there is some provision for solving disputes, although I personally do not like that word penalty out there, which is still giving people a chance to de-litigate.”
For decades, the tax part of the law had always some complex issues. Experts point out that a step has been taken towards simplification of taxes by adopting the proposals of the Easwar Committee report to the benefit of Indian companies. Says Dsouza: “Committees do get formed, but having them passed into law is something that the Budget has changed.”
On corporate indirect tax issues, as usual, the Budget has given incentives to some sectors, while reducing benefits to other sectors. For some companies, the budget has not been good. As always, cigarettes and consumption of tobacco is the favourite sector of the government for tax imposition. Tax on cigarettes has been raised by as much as 15 per cent, affecting cigarette manufacturers.
With the imposition of an infrastructure cess ranging from 1 per cent to 4 per cent, car manufacturers will be affected as cars will cost more, and that goes for companies such as Maruti and Tata Motors. Besides, the government has further imposed a cess of one per cent on luxury cars costing over Rs 10 lakh. The Budget has also imposed excise duty on jewellery, which will hit jewellery manufacturers like Titan.
Among the proposals, housing developers have been allowed to deduct 100 per cent of their profits for affordable housing projects approved until March 2019, and some of the low-cost housing providers will gain from this move.
Not many will gain, of course. The government has started small but experts feel that the first step of streamlining taxes is not going to be easy given the huge tax administration issue and simplification always takes time. Says Dsouza: “You can always say that something could have done better in the budget. But you have to remember there is a huge administration issue. I don’t think that he can satisfy everyone.”
That’s why now almost all companies are waiting for the next budget when the big relief on direct taxes will be announced which could boost earnings for the vast majority. At some point, almost all companies will be taxed at the same rate, and that will facilitate better comparison for the capital market number crunchers. And if the barometer of the economy is any indication, stock markets are not complaining that too little has been done.