More than a fifth of firms chose exemption-free regime in FY21 | The Financial Express

More than a fifth of firms chose exemption-free regime in FY21

These firms accounted for 61% of corporate income

More than a fifth of firms chose exemption-free regime in FY21
Effective tax rate 22.2% in FY21 against 29.5% in FY18 (File/Pixabay)

More companies switched over to the concessional corporate tax regime in 2020-21, which also helped lower the overall effective corporate tax rate marginally to 22.2% in the fiscal from 22.54% in 2019-20. The effective tax rate was 29.49% in 2017-18 before the concessional rates were introduced.

Data from the Union Budget reveals that the number of companies opting for the exemption-less 22% corporate tax regime in FY21 rose by 35.9% to 0.197 million firms from 0.145 million in FY19. Another 3,508 companies chose the 15% concessional corporate rate for new manufacturing companies in FY20 from 1,244 companies in FY19.

About 20.5% of the companies having 61.35% of the corporate income reported opted for the concessinal tax regime, in FY21 as against less than 16% of the companies in FY20.

In all, 0.961 million corporate tax returns were filed in FY21 with a reported corporate tax liability of Rs 4.67 trillion.  About 0.92 million corporate tax returns were filed in FY20.  

While in absolute terms, the number of firms moving to the concessional tax rate is still low, most large firms with profit before tax of over Rs 500 crore have switched over to it. Of the 517 companies with PBT of over Rs 500 crore in FY21, 308 firms had switched to the 22% tax rate. These 517 firms made up for more than half of the share of corporate income tax liability at 53.52% in FY20.

In a mid-year announcement in 2019 to promote growth and investments, the government had inserted a new provision of Section 115BAA in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22% subject to condition that they will not avail any exemption/incentive.  Further, to boost domestic manufacturing, it had also inserted another new provision of Section 115BAB with effect from FY 2019-20 which allows any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. The sunset date for this is March 31, 2024.

 Thus, 20.47% as against 15.85% in FY20, of the companies having 61.35% of the total income of have opted for the new tax scheme of 115BAA and 0.36% companies have opted for taking benefit under Section 115BAB of the Act,” said the Budget document, adding that it reflects an encouraging trend towards adoption of the concessional tax regime by the companies and a simultaneous move away from the deduction and exemption scheme.  

The effective tax rate of companies with PBT greater than Rs 500 crore is 19.14%, which is lower than all the companies having PBT below Rs 500 crore. “This highlights that larger companies are availing the higher deductions and incentives or have shifted to the new regime of lower tax of 22% of cess and surcharge,” the document noted. The effective tax rate for these firms was 20.19% in FY20.

Finance ministry officials have said the popularity of the concessional tax regime is on the rise and they expect more companies to switch to it as their exemptions come to an end. However, they said it is expected that not all firms would move to it as they continue to get the benefit of various exemptions and Minimum Alternate Tax.

The company may have losses so they would like to remain in the 30% regime. There could be Chapter 6A deduction of backward areas, or MAT credit. There are several features where the companies may like to stay in the 30% regime,” CBDT Chairperson Nitin Gupta had told FE. Tax experts have also noted that each company makes its own calculations to understand the exact tax liability in the two regimes before choosing to opt for either.

The Budget noted that another indicator of more companies choosing the concessional tax rates is the reduction in the actual tax expenditure as against the initial projection. The projected tax expenditure for FY21 (exclusive additional tax due to MAT payment) was Rs 1.11 trillion, it has actually been calculated at Rs 75,151.07 crore. The tax expenditure is the revenue foregone due to various deductions and exemptions taken by corporate taxpayers.

In all, there are four corporate tax rates in the country at present. Apart from the concessional rates of 22% and 15%, a 25% rate is levied on domestic companies with a total turnover or gross receipts during the previous year of up to Rs 400 crore. A 30% tax is applicable on all other domestic companies.

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First published on: 06-02-2023 at 01:00 IST