A stable, competitive tax regime key to attracting investments

Published: September 21, 2019 4:05:35 AM

Now, with the announcement that minimum alternate tax (MAT) shall not be applicable for domestic companies not availing any tax exemptions, a more simplified tax structure has come about that will attract investment.

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By Naveen Aggarwal

If the stock market surge yesterday is to be believed, then September 20, 2019, might go down as a memorable day in the Indian tax landscape. While India Inc waited with bated breath for an impending course correction on the GST landscape, with an all-important council meeting yesterday, the finance minister had a lot more to offer.

In what should be seen as a fulfilment of the government’s promise to rationalise corporate tax rates, a baseline tax rate of 22% for domestic companies not claiming any tax holiday and concessions is certainly a leap in that direction. With an average global corporate tax rate of around 23%, the announcement by FM Nirmala Sitharaman on Friday, led to India joining an elite club of countries offering a highly competitive and compelling tax regime for investors. The stimulus does not stop here, and in a significant boost to the government’s ‘Make in India’ plans, there is also a proposed new lower corporate tax rate, of 15%, for new manufacturing entities, which are set up after October 1, 2019, and which do not claim any tax exemptions. With a changing global trade dynamic, these measures become even more potent in the backdrop of the recent liberalisation of FDI norms in single-brand retail, contract manufacturing, and other areas.

The current administration’s focus on responsible governance flows through the announcement on Corporate Social Responsibility (CSR), where, it appears, a balance has been sought for both corporate India as well as the government by widening the options available to businesses to deploy their 2% CSR spend on Public Sector Incubators, and government educational & research institutions. Hopefully, this would also positively impact new innovation and talent development, which is something that both the private and the public sector could surely gain from in the coming years.

With the gradual phasing away of incentives, the difference between taxable profits and book profits has narrowed down. Now, with the announcement that minimum alternate tax (MAT) shall not be applicable for domestic companies not availing any tax exemptions, a more simplified tax structure has come about that will attract investment. Further, for existing companies availing tax concessions, the reduction of rate of MAT from 18.5% to 15% goes quite some distance in pleasing the domestic corporate tax payer.

Amongst the widespread cheer the announcement has generated, there are a few reasons to delve into the fine print. For example, there is a need for clarity on whether companies that opt for the reduced MAT rate will be able to utilise their existing MAT credits, or whether those would lapse. In addition, the 15% concessional rate to manufacturing companies is contingent upon the companies initiating operations by March 31, 2023; however, a key issue that would require careful deliberation is whether there is a claw back mechanism if such conditions are not met.

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The announcements did not contain any mention of proposed rate cuts for foreign companies, which will continue to be taxed at a higher rate of 40% plus surcharge/cess. For them, having a local subsidiary may now be a much more compelling proposition than ever before. Similarly, no rate changes are proposed for limited liability partnerships and full partnerships, but the fact is that these entities also benefit from not being subject to dividend distribution tax.

In essence, a stable and competitive tax regime is a critical determinant for investors to arrive at the final choice of jurisdiction for setting up business/making investments.

The hallmark of the current Indian administration has been to drive continuous reforms with decisive action, and there is no doubt that the time is ripe to actively look at bringing in the required structural reforms in the overall income-tax ecosystem. In my view, the writing is very much on the wall. India continues to leap forward on a path towards becoming a premier investment destination, offering a simplified, fair, and competitive tax regime.

Author is Partner and Chief Operating Officer, Tax, KPMG in India. Views are personal.

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