The concessional corporate tax rate of 22% introduced in 2019 is still to be chosen by large sections of India Inc. This is because many companies, including large ones, find either the Minimum Alternate Tax regime or higher corporate tax rates of 25% or 30% coupled with exemptions and incentives more attractive, in the final analysis.
Another deterrent is that opting for the concessional regime is irreversible and companies cannot move back to the old regime again, in case they plan any expansions in the future and wish to take advantage of any deductions.
According to official data, of the 0.92 million corporate returns filed in 2019-20, 0.145 million firms with income of Rs 9.33 trillion opted for the 22% tax rate (25.168% with surcharge and cess).
“…15.85% of the companies having 62.01% of the total income have opted for the new tax scheme under section 115BAA and 0.14 % companies opted for taking benefit under section 115BAB of the Act (in 2019-20). It reflects an encouraging trend towards adoption of the new concessional tax regime by the companies and a simultaneous move away from the deduction and exemption regime,” said the Budget document for 2022-23.
In a bid to promote growth and investment, the government had in 2019 slashed the corporate tax rate to 22% for domestic companies, provided they do not avail any exemption or incentive. They would also not have to pay MAT, which is currently applied at 15% (plus surcharge and cess) on book profits.
Tax experts say that on evaluating the concessional tax rate, many companies have opted to continue with their earlier tax regime.
Sandeep Bhalla, Partner, Dhruva Advisors said it is largely the smaller companies or service sector companies that choose the concessional 22% tax regime. Large manufacturing companies or those which are more capital intensive prefer paying tax under the old regime as even if they are subjected to MAT, which is viewed more as cash flow issue, they are able to utilise the MAT credit in subsequent years. “Overall, with the surcharge, the effective tax rate of the concessional regime is a little more than 25% versus an effective tax rate of 20% under MAT,” he said.
Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP said the deductions to be foregone to claim the concessional tax rate made the proposition less lucrative for industry players for whom these deductions mounted up to significant numbers. “For such taxpayers, it was a choice between claiming the benefit of the delta of a meagre 3% by foregoing the deductions versus paying taxes at 25% on income after claiming the deductions,” he said, adding that capital-intensive industries lose out on the benefit of additional 20% depreciation on investments made in plant and machinery.
Giving up deductions also comes with the restriction to carry forward and set off of past year losses attributable to such deductions which in some way has a roll back effect and could entail higher cash outflows under the new regime. In addition, lapse of accumulated MAT credit, which is more likely in companies having accumulated losses under normal tax provisions, is a dampener.
Companies operating out of SEZs cannot claim the income linked deductions under Section 10AA in order to switch to the new regime. “Hence, a deduction that could have been claimed over a period of 15 years subject to satisfaction of certain conditions, would have to be discontinued in order to opt for the new 22% tax regime,” he said.
Further, the concessional rate is to be opted at an entity level. This can be a disadvantage for companies with multiple SEZ units which are in different years of operation. They would have to wait for completion of the exemption window for all their SEZ units before they can opt for the new regime.
The effective corporate tax rate was 22.54% in 2019-20 as against 27.81% in 2018-19. The Budget document attributed the significant reduction in effective tax rate to the fact that a significant number of companies with higher profits had shifted to the new tax regime provided for existing companies under section 115BAA.
The effective tax rate of companies with profit before taxes of over Rs 500 crore is 20.19%, which is lower than all the companies having profit before taxes below Rs 500 crore. “This highlights that the larger companies are availing the higher deductions and incentives or have shifted to the new regime of lower tax rate of 22% plus cess and surcharge,” it said.
In all, there are four corporate tax rates prevailing in India at present. Apart from the 22% concessional rate, there is a 15% concessional rate for new domestic companies incorporated on or after October 1, 2019 and commencing production by March 31, 2024. 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.
The concessional rate is subject to a host of conditions like not claiming tax holiday meant for Special Economic Zone units, benefit of accelerated depreciation, or benefit of additional depreciation, investment allowances, expenditure on scientific research etc.