In the backdrop of the US slashing its headline corporate tax rate from 35 per cent to 21 per cent, there were expectations that Finance Minister Arun Jaitley would also effect a cut for companies from the 30 per cent peak rate that they pay at present. However, these hopes were dashed, as the government took a more incremental approach. Jaitley reduced the tax rate from 30 per cent to 25 per cent, but only for companies with annual turnover of up to `250 crore. Though, as he said, this covers 99 per cent companies, it leaves out the larger taxpayers - those who accounted for more than 70 per cent of the corporate tax liabilities in 2016/17.
"This is a dampener, especially when developed countries have been cutting corporate tax rates substantially," says Amarjeet Singh, Partner, and North India Tax head, KPMG in India.
Sanjay kumar, Senior Director, Deloitte India, echoes this. "Big corporates were thinking that in view of many countries, including the US and the UK, which are big investors in India, reducing their rates to 20-21 per cent, India will also do so. This creates a tax differential of about 10 per cent which, in any cost-benefit analysis for investing in India, will be difficult to bridge," he says.
However, one argument in favour of this move is that many large companies with over `500 crore profit before tax, or PBT, are anyways paying less than 25 per cent. The revenue foregone document that comes with the Union Budget shows that in 2016/17, companies with more than `500 crore PBT paid an effective tax rate of 24 per cent.
Rahul Garg, Leader, Direct Taxes, PwC India, says the government is using a lot of data analytics in Budget preparation. "They must have seen that the larger companies are anyway paying less than 25 per cent. It is the smaller companies which have been paying higher rates," he says. The effective tax rate is arrived at after adjusting for exemption benefits.
Amarjeet Singh of KPMG, however, says that the government has been doing away with exemptions and this argument no longer holds true. Besides, if one includes surcharge, cesses and dividend distribution tax, the companies are paying as much as 45 per cent, he says. "If you want to revive the investment cycle, these are the companies (the larger ones) which have the resources to do that. Any tax benefit to them would have helped them free resources for capex," he says.
To make matter worse, Education Cess and Secondary and Higher Education Cess of 3 per cent has been replaced by Health and Education Cess of 4 per cent, increasing the overall tax on companies from 34.6 per cent to 35 per cent.
Long-term Capital Loss
The Budget took the bold step of taxing long-term capital gains, or LTCG, from equities by levying a 10 per cent tax on profits of more than `1 lakh. This is a big jolt to foreign institutional investors, or FIIs, many of which are long-only funds. Till December 2017, they had invested `28.34 lakh crore in Indian equities. The tax burden would make India less attractive for them.
Amit Maheshwari, Managing Partner and International Tax Lead of Ashok Maheshwary & Associates, says, "FIIs were already hit by changes in Mauritius and Singapore tax treaties that made short-term capital gains taxable for FIIs based in these jurisdictions. Now, with tax on long-term capital gains, the attractiveness of Indian equities has further come down." What adds to the woes of equity investors is that the government has not done away with the securities transaction tax, or STT, which was introduced when LTCG tax was scrapped in the early 2000s.
However, the government has its reasons - one being generating additional revenue for some ambitious agriculture and social programmes. Explaining the rationale behind the move, the finance minister said, "The total amount of exempted capital gains from listed shares and units is around `3.67 lakh crore in assessment year 2017/18. Major part of this gain has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets."
On Budget day, stock markets didnt take the announcement too unkindly and closed in the green, making Finance Secretary Hasmukh Adhia say the market has taken the move positively. However, the next day, they tumbled more than 2 per cent.
CBDT Chairman Sushil Chandra told reporters that the government expects to collect `20,000 crore from the move in 2018/19. The government has also increased the estimate for STT collections to `11,000 crore, 42 per cent more than the revised estimate of `7,767 crore for 2017/18.
BEPS: On a faster lane
The government seems to be on a fast lane when it comes to implementing the BEPS (Base Erosion and Profit Shifting) initiative of the OECD. After implementing equalisation levy in 2016 (the first country to do so), and country-by-country reporting last year, this year the Budget has adopted another BEPS proposal with regards to taxability of foreign enterprises in India. A foreign enterprise is taxable in India in respect of business profits if it has a business connection in India. The present definition of business connection creates a taxable presence if, among other things, the enterprise undertakes physical business activities in India or habitually concludes contracts in India through a dependent agent. The Budget has made a couple of changes in the I-T Act to bring the law in line with the relevant BEPS proposal. Now, a business connection will be constituted if the dependent agent of the foreign enterprise habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts by the foreign enterprise. Therefore, the business connection test has moved from formal conclusion of contracts to include negotiation of key terms of the contract.
Amarjeet Singh of KPMG says taking the lead in implementing the BEPS proposal will make India further tax inefficient compared to other economies.
Facilitating Insolvency proceedings
The Budget, though, was not all gloom for companies. There were some positives, including changes in tax laws to facilitate insolvency process. At present, a closely-held company is not allowed to carry forward its previous years tax losses if there is a change in its shareholding in excess of 50 per cent. This can result in companies losing their accumulated tax losses in case of acquisition by other companies as part of the insolvency process. The Budget has exempted companies under insolvency from this law.
Start-ups gets a leg-up
Though start-ups had a long list of demands, not all have been met. However, the government has made the tax holiday scheme a little more attractive. At present, eligible start-ups can avail of tax holiday for three consecutive years out of seven years beginning the year of incorporation. However, there were certain conditions - like the start-up should have been incorporated before April 1, 2019, and turnover should not be more than `25 crore in any previous years beginning April 1, 2016 and ending March 31, 2021.
The Budget has eased the conditions a bit. The benefits will also be available to start-ups incorporated before April 1, 2021, and the turnover threshold of `25 crore will apply to seven years from the date of incorporation.
The Budget has mostly disappointed India Inc. as far as corporate tax announcements are concerned. The biggest fear is the country losing its tax attractiveness for both foreign portfolio and business investors. With countries like the US and the UK following aggressive tax policies, it is to be seen how much Indias economic prospects neutralise these in the medium to long term.