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 mid-2019.
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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 all businesses.
“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.”
In 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 & Associates.
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 reform.
“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 keeping with 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 in India.”
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 controversies.”
“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 its abolition.”
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.
“Mr Jaitley 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 2018.”
“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 corporatisation.”
“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.
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