India’s annual budget is one of the most keenly
awaited economic events in India. This year’s
budget is the last full budget to be presented by Finance
Minister Arun Jaitley before the general elections are held in
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Ahead of the much anticipated budget, ITR spoke to
several practitioners in India to get their headline
predictions for the budget.
This article is the first of a two-part preview of
India's budget. The second part, which examines potential
changes to GST and more, can be read here.
Will the corporate tax rate fall?
The question on everyone’s lips is whether or
not the headline corporate income tax (CIT) rate will fall for
"The most looked-forward-to corporate tax measure in this
year’s budget is rationalisation of the corporate
tax rate," said Hitesh Gajaria, a partner at KPMG India. "In
2015, the government had announced a reduction of tax rates
from 30% to 25%, accompanied by fewer tax exemptions, over four
years. However, the corporate tax rate has been reduced
only on a selective basis and one is yet to see a full-fledged
rate reduction across the board."
last year’s budget, micro, small and
medium-sized enterprises (MSMEs) with an annual turnover up to
INR 500 million ($7.4 million) received a corporate tax
reduction from 30% to 25%. This year, tax professionals want to
see this rolled out to all companies.
"The prime wish-list of India Inc. pertains to reduction in
headline corporate tax rate to 25% across all companies
(irrespective of size of turnover or type of business
activity)," added Jiger Saiya, partner at MSKA &
Spurred on by the US’s
significant cut in its corporate tax rate just before the
turn of the year, companies can be optimistic that
India’s rate will now fall. Such a result would
also be consistent with India’s oft-stated aim to
encourage more foreign investment – something
neighbouring China has also moved to do following US tax
"Budget 2018 arrives in the back drop of urgent need for
reviving private investment and job creation," practitioners
from Deloitte told International Tax Review.
"With the US announcing the headline corporate tax
reduction, it is likely that India would follow suit and reduce
the corporate tax rate," said Gajaria. "This would be in
the global trend of falling corporate tax rates as
countries seek to improve their competitiveness by lowering tax
rates on companies."
But Vikas Vasal, national leader for tax at Grant Thornton
in India, was more cautious. "There are high expectations that
corporate tax rate will be pruned, especially considering that
more developed economies have brought down their headline tax
rates," he told ITR. "However, it would have to be a
balancing act between fiscal prudence and promoting investment
What will happen with the minimum alternate tax (MAT)?
If the CIT rate is reduced, policymakers will also have to
be examine the minimum alternate tax (MAT).
"With the reduction of the corporate tax rate, the case for
reduction of MAT becomes stronger," said Gajaria. "Accordingly,
a likely reduction in the rate of MAT companies is expected,
though the expectation of the industry is abolition of MAT as
the MAT provisions are not free from their own set of
"The reduction of the corporate tax rate is expected to be
accompanied by a reduction in tax incentives. Thus, minimising
the difference between the base for computation of corporate
tax and MAT," concurred Vasal. "As a result, relevance of MAT
provisions would become limited and hence there is a demand for
Vasal does not, however, think that the MAT will be
abolished outright, pointing to a recent
press release by the Central Board of Direct Taxes allowing
for a relaxation of the rules around the levying of the MAT for
insolvent companies as evidence the tax is set to endure.
in his last budget speech indicated that full benefit of
exemptions taken out will accrue to government only after seven
to 10 years, it may not be practical for the government to
abolish MAT at this stage," said Saiya. "The finance minister
is likely to stand by
his statement and not alter MAT provisions in budget of
"It remains to be seen whether the government offers consent
to the demand of industry to parallely phase out MAT provisions
since the differences in taxable income and book profit income
will be nullified by elimination of tax holidays and
incentives," he added.
Deloitte suggested that Jaitley could announce a roadmap to
reduce the MAT rate to 7.5% during the next five years before
finally abolishing it.
The future of the dividend distribution tax
But changes in the headline rate and the MAT are far from
the whole story as India tries to increase investment and job
creation using its tax system.
Finance Minister Arun Jaitley could opt to reduce, or
abolish entirely, the dividend distribution tax (DDT).
The DDT makes India’s effective tax rate even
higher than the 30% headline rate, and this is pushed higher
still by the surcharge and education cess.
"Profits suffer taxes at three stages before a shareholder
can enjoy them: corporate tax, DDT and income tax paid on
receipt of dividend," said Saiya. "Effectively, the shareholder
is left with less than 50% of profits. It is time the regime
was re-evaluated with an aim to promote investment and
"There is also an apprehension that the government may
remove the capital gain tax exemption on shares accompanied
with removal of STT [securities transaction tax] to avoid
double taxation," said Deloitte.
Although the exact budget proposals will only be know when
Jaitley makes his budget speech on February 1, tax
professionals agree that corporate tax rates, changes to tax
incentives, the MAT, and personal tax rates will feature.
We will be examining the implications all of the tax
proposals the day the budget is announced. Don’t
forget to register for our webinar here: http://bit.ly/Indiabudget2018.