Prioritising tax incentives for job-creating smaller companies with annual turnover up to Rs 50 crore over large ones, the government on Wednesday announced reduction in corporate tax rate for MSMEs to 25% from 30% to make them competitive and shift to a company format.
Among other measures in the FY18 Budget, finance minister Arun Jaitley relaxed conditions for tax-exempted start-ups to allow them to carry forward losses even after original promoters reduce their holding to below 51%. Also, the profit-linked deduction available to the start-ups for 3 years out of 5 years is being changed to 3 out of 7 years.
The absence of any announcement on reduction of tax rates for large corporates as per the government’s road map was seen as a disappointment by industry lobby CII. While there was also an expectation that minimum alternate tax (MAT) rate for the so-called ‘zero-tax’ companies would come down, there was minor relief instead in tax credit carry forward. The time limit to claim the MAT credit has been increased from existing 10 years to 15 years.
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In Budget FY16, the government had unveiled a plan to reduce the corporate tax rate from 30% to 25% in four years to make India’s tax rates globally competitive. In the subsequent year, it cut the rate to 29% for those companies which reported total turnover/gross receipts up to R5 crore in FY15 and to 25% for newly incorporated domestic firms. As per the blueprint, all tax corporate incentives for which no end date has been specified in the law will be phased out from April 1, 2017.
Justifying the reduction in corporate tax rates for small firms, Jaitley said: “As per data of FY16, 2.85 lakh companies making profit of less than R1 crore pay effective tax rate of 30.26% while 298 firms making profit above R500 crore pay effective tax rate of 25.90%.” Percentage-wise, 96% of companies will get this benefit of lower taxation. The revenue forgone estimate for this measure is expected to be R7,200 crore per annum.
The government also stuck to its earlier plan to roll out two anti-tax avoidance regulations — Place of Effective Management (POEM) from assessment year 2017-18 and the General Anti-Avoidance Rules (GAAR) from assessment year 2018-19.