Finance Minister Arun Jaitley on Wednesday sought to provide some relief to small corporates by reducing income tax for those with annual turnover up to Rs 50 crore by 5 per cent to 25 per cent but dithered on reducing the headline corporate tax rate of 25 per cent disappointing the industry at large.
The reduction in income tax announced in the budget would impact 6.67 lakh companies that make a majority 96 per cent of all the companies filing returns in the country today. The loss of revenue to the government due to this would be Rs 7200 per annum.
Currently, smaller companies are liable to pay a higher rate of tax compared to their bigger cousins. As per 2015-16 date there are 2.85 lakh companies with a profit of less than Rs 1 crore that pay an effective tax rate of 30.26 per cent while 298 companies with profit of above Rs 500 crore fall under the effective tax rate bracket of just 25.90 per cent.
"This will make our MSME sector more competitive as compared to large companies," Jaitley said in his budget speech. "Medium and Small Enterprises occupy bulk of economic activities and are also instrumental in providing maximum employment to people. However, since they do not get many exemptions, they end up paying more taxes as compared to large companies."
The decision to not bring down corporate tax rate of 30 per cent has however left the industry disappointed. While presenting his budget in 2015, Jaitley had said he would gradually bring down the corporate income tax rate down to 25 per cent. Last year, he had also announced a reduction by 1 per cent for companies with annual turnover of less than Rs 5 crore.
"Non reduction of headline tax rates will be a major disappointment to many," said Milind Kothari. Managing Partner & Head of Direct Tax, BDO India. " Nearly everyone expected that the Budget will reduce the corporate tax rate that would have helped India align to the rest of the world regime where the tax rates are constantly dropping. To win more investment, India needs to compete with the rest of the world economies, including emerging economies."
The worldwide top corporate income tax rate is 22.6 per cent and has declined over the past decade from 29.5 per cent. Europe has one of the lowest tax rate of 18.6 per cent while Africa has an effective tax rate of 29.1 per cent.
Even though the headline corporate tax rate in India is high, Jaitley had in the past bemoaned the plethora of exemptions available to companies that brings down the overall effective tax rate for all companies at just 24.67 per cent.