Govt may retain tax sops for needy firms, start-ups to be on preferred list

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New Delhi | Updated: November 30, 2015 11:54 AM

To soften the blow to the industry from the phasing out of corporate tax incentives, the government is considering some relaxations in the schedule of withdrawal of the sops for select industrial segments as well as giving special financial support to the needy others.

taxThe current plan, for which comments have been sought, attempts to phase out tax breaks accounting for more than 90% of the estimated revenue forgone (without adjusting for MAT recovery) which stood at R 98,408 crore for the year 2014. (PTI)

To soften the blow to the industry from the phasing out of corporate tax incentives, the government is considering some relaxations in the schedule of withdrawal of the sops for select industrial segments as well as giving special financial support to the needy others.

According to official sources, the relaxations would primarily be given to manufacturing units, start-ups and companies partnering with the government in skill development. The government would be favourably inclined to retain some of the tax exemptions for specific industries, especially those in the MSME segment, which account for a relatively smaller share in its tax receipts but currently have an effective tax rate higher than that of large corporate which enjoy major tax incentives.

Also, if specific industries could convince the government about possible hardships on account of phasing out tax breaks, it may also weigh the option of granting direct financial support to these industries. These special assistance would be akin to the fiscal benefits accorded to highway projects which were facing delays not entirely attributable to the developers and the excise and customs duty breaks for the domestic ship building industry.

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At present, businesses which contribute a smaller share of corporate tax to the exchequer have an effective tax rate — after accounting for tax incentives — of 26% or more, while the large industries that account for the lion’s share of corporate tax receipts pay an ETR of 20% or thereabouts. The average ETR for 2014-15 stood at 23.22%. Removing tax incentives accompanied by a cut in the highest marginal tax rate from 30% now to 25% in a few years is expected to correct the asymmetry. But the finance ministry reckons that a favourable bias towards smaller businesses, which may need a helping hand, could be in order, sources added. “The idea of removing tax exemptions to bring in a globally competitive tax rate is good. Besides improving the ease of doing business, it will reduce the disparity between sectors that currently get tax breaks and those that do not. The specific industries which may have to forgo the incentives may feel the pinch if their effective tax rate goes up. In sectors like infrastructure or power, where the country lags behind targets, the government could take a balanced view whether the exemptions need to continue for some more time, or not,” said, Vikas Vasal, tax partner, KPMG.

The current plan, for which comments have been sought, attempts to phase out tax breaks accounting for more than 90% of the estimated revenue forgone (without adjusting for MAT recovery) which stood at R 98,408 crore for the year 2014. Industry representative welcomed the official approach of putting out the incentive phase out plan in black and white ahead of the next Union Budget, which many said was a first of its kind.

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