Reduction in Corporate Tax - SMEs to Benefit

A tax cut has recently been announced by the government, for companies in India which have an annual turnover of anywhere between ₹250 crore and ₹400 crore. The rate of taxation has dropped from 30 percent to 25 percent of total annual income. The effective rate of corporate tax (including cess and surcharge) has, therefore, come down to 29.12 percent from the much higher rate of 34.94 percent prevalent in the past. These numbers have been arrived at with the assumption that the company will make an income in excess of ₹10 crore per year.

A New Tax on Share Buybacks

To plug a loophole in the corporate tax policy, a tax rate of 20 percent (plus cess and surcharge) on share buybacks has been announced. This is because companies had been opting for buybacks in order to avoid the 15 percent dividend distribution tax, which effectively required a payout of almost 20 percent. Experts believe that the move to introduce a 20 percent tax on buybacks could impact commercial activity and corporate policy in India. In the financial year 2018-19, more than sixty companies resorted to buybacks in order to escape the dividend distribution tax. IT giants such as HCL Technologies, TCS, and Tech Mahindra were some of the companies which opted for buybacks. Companies such as ONGC, Oil India, BHEL, NMDC, and Coal India also took advantage of the aforementioned loophole in the corporate tax policy over the past few years. Now that a 20 percent tax rate has been announced for buybacks, these large corporations may consider resuming dividend declarations in the upcoming year. However, the move may prove costly for companies that have a currently ongoing share buyback process. They will not be able to change track in time to avoid the 20 percent tax this financial year.

Tax Relief for SMEs

Over the last half-decade, the government has worked to provide relief to small and medium-sized enterprises (SMEs and MSMEs) via corporate tax reductions. This is evidenced by the fact that, in the financial year 2018-19, companies with an annual turnover of less than ₹250 crore had to pay corporate tax at an effective rate of 18.2 percent. By contrast, in the year 2013-14, companies in this category paid corporate tax at an effective rate of 22.9 percent. However, the government has been successful, overall, in its tax-collection efforts from profitable businesses or companies in the listed space. The effective rate of taxation in 2018-19 was 25.8 percent for all listed companies turning a profit in India. In 2013-14, the combined tax paid by all listed companies in India was 24 percent of income, slightly lower than the present rate.

An Increase in Cess and Surcharge

This increase in the effective rate of corporate tax for all listed companies was caused by a rise in the rate of surcharge paid by the businesses. The surcharge on corporate tax rose in 2015-16, though the rate of increase varied depending on the size of the company. Companies earning ₹10 crore or less annually had to pay a surcharge of 7 percent, as opposed to the 5 percent they were required to pay earlier. On the other hand, corporations which earned an income of more than ₹10 crore had to pay a surcharge of 12 percent, instead of the 10 percent they had paid before. In 2018, it was also announced that all companies subject to cess would have to pay an education cess of 4 percent – up from the 3 percent charged earlier – as an additional levy on the basic corporate tax liability.

Incentivising Small Businesses and Making Large Corporations Pay More

The total number of corporate tax returns filed in India has increased drastically over the last few years. For the FY2018-19, the amount of corporate tax collected in India was more than ₹6.5 lakh crore, as reported by the CGA. This was an increase of no less than 16 percent over the amount of corporate tax collected the previous year (FY2017-18). This process of reducing tax avoidance by corporations and improving the tax collection made by the government was kick-started in 2015. The government introduced a process for the phased reduction in corporate tax rates, which culminated in a drop from 30 percent of total income to 25 percent. At the same time, the government also began eliminating tax exemptions, one phase at a time. This served the dual purpose of plugging taxation loopholes and lowering the tax burden on corporations. It also levelled the playing field in the business world to a certain extent, providing relief to small and medium scale businesses that had historically borne a larger-than-expected share of the corporate tax burden. As small companies had to pay a disproportionate amount of corporate tax due to the loopholes that had existed until now, the government has decided to reduce some tax incentives for large corporates. Also, some other incentives benefiting large companies have been completely removed since 2016-17. Moreover, the statutory tax rate has been brought down for small enterprises so as to promote their growth.

Overall Impact of the Changes in Corporate Tax Policy

In conclusion, the reduction in corporate tax rates introduced by the central government has helped lower the tax burden on SMEs and MSMEs in India, enabling them to grow faster. On the other hand, large corporations are being made to pay higher taxes than before, with more and more deductions and incentives being phased out. As a result of these policies, the total amount of corporate tax being collected by the government has increased, despite reductions in the overall taxation rates. Experts believe that this will help small companies in India grow faster while also ensuring that the government's tax kitty remains full. In the long run, both the government and India Inc. stand to benefit from these policies. Overall, while corporations will not gain any relief from minimum alternative tax or MAT under the new regime, companies making a turnover of less than ₹400 crore (but above ₹250 crore) will now have to pay lower rates of corporate tax. Listed companies will have to pay a 20 percent tax on share buybacks, which will hopefully plug a loophole that had been used for tax avoidance in the past. However, less than 1 percent of all companies will have to pay higher taxes, as the threshold for the basic 25 percent tax rate has risen to ₹400 crore.

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