Those who are in SEZs, such as software companies, will likely continue with the old regime, as their effective tax rates in certain cases may be lower.
Sudhir Kapadia, partner and national tax leader at E&Y India, says the government’s move to cut the corporate tax rates sharply for domestic companies will narrow our traditional uncompetitiveness with Asean countries and help India attract some of the players who are looking to shift out of China due to the global trade war. In an interview with FE’s Banikinkar Pattanayak, he says the widening gap between corporate tax rates and personal income tax rates is nothing unusual and that with higher investment, consumption, too, will get a boost. Edited excerpts:
Will the move to tax new units at 15% (against the revised standard rate of 22%) lead to tax diversion by large corporations, which will now float various new subsidiaries out of existing businesses to claim the lower tax rates?
It’s not a tax diversion. It gives a choice to companies to set up new entities and avail of lower tax rates. The important thing here is that the lower tax rate is for fresh investments, and not for existing investments. The move will help entrepreneurs boost their returns on investments.
The tax cuts come at the peak of a global trade war when some multi-national corporations are looking at shifting out of China. Will we now be able to attract some of these players?
Certainly, it will make India much more attractive now because the corporate tax rate in Asean members has been traditionally lower than India, which was hurting our ability to lure investments. Of course, there are other issues, besides tax rates. But after-tax returns in India were much lower. And now, at least we will be able to compete with Asean much better and attract players wanting to shift investments due to the global trade war.
After this move, what categories of companies will opt for the new regime and who will still want to go ahead with old rates with exemptions?
Those who are in SEZs, such as software companies, will likely continue with the old regime, as their effective tax rates in certain cases may be lower. But my view is that most other companies will opt for the new regime because it serves two important purposes. First, availing of exemptions is a complicated process and may lead to litigation as well, while the new regime offers much more certainty and predictability (about tax liability). Second, thanks to the phasing out of several exemptions, the effective tax outgo of many companies are higher than 25.17% (which is what most companies will pay under the new regime), in many cases about 28-33%. So these companies will find it attractive to switch to the new regime.
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Doesn’t the reduction in corporate tax rates now make the already existing asymmetry with high personal income tax rates even starker?
There is no conflict there. Corporate tax, by definition, is double taxation. While the company may be an artificial entity, salaries paid by it is taxed in the hands of individuals. Similarly, dividends are taxed. Also, investments are attracted through the corporate structure. So most of the countries keep corporate tax rates lower than personal income tax rates. Let’s put it this way: the government’s choice was between reducing corporate tax rates and personal income tax rates, and I think the idea to trim the corporate tax rate was to increase investments and growth.
Will it be enough to stimulate economic growth, as what we witness now is a consumption slowdown and this is not a consumption stimulus?
Lower corporate taxes can lead to consumption growth as well, because more money will be available. If the companies earn more, they will also declare dividends. Similarly, if companies invest, more jobs will be created; it will help consumption because investments breed income. So definitely, I think there will be a trickle-down positive impact.