Budget 2016: Corporate tax rate cut a slow but sure start

In a bid to boost investments and spur growth, finance minister Arun Jaitley has cut the basic corporate tax rate to 29% from the existing 30%, but only for companies with a turnover of Rs 5 crore. This will be the first phase of the plan announced in the last Budget to reduce corporate tax rate to 25% over the next four years.

"The reduction in corporate tax rate has to be calibrated with additional revenue expected from the incentives being phased out," Jaitley said in his Budget speech.

"Benefits from phasing out of exemptions will be available to government only gradually," he said. Hence the reduction in rates are not applicable to the big companies/firms this year.

The revised corporate tax rate is for relatively small enterprises i.e. firms with turnover not exceeding Rs 5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.

Subsequently, the new manufacturing companies which are incorporated on or after March 1 are proposed to be given an option to be taxed at 25% plus surcharge and cess provided they do not claim profit-linked or investment-linked deductions and do not avail of investment allowance and accelerated depreciation.

The reduction will subsequently phase out the tax exemptions given to special economic zones (SEZs), production of natural and mineral oils, export-import benefits.

For instance, profit-linked incentives relating to infrastructure facility (section 80IA), development of SEZ and production of mineral oil and natural gas are to be phased out from financial year 2017-18. In addition, current tax incentives for SEZ are to be discontinued for units commencing production after April 1 2020.

Further, accelerated depreciation rate is proposed to be restricted to 40% which would directly impact renewable energy sector.

"The move to lower corporate taxation would certainly improve government revenues and help tax sleuths focus on improving higher revenues for the government," a senior income-tax official told dna.

Presently, tax holidays are available only for SEZs and manufacturing units set up in the North-East and some special category states like Jammu and Kashmir and Himachal Pradesh.

"The government has placed a definitive road map spelling out the manner in which various incentives shall be phased out. It will provide clarity to firms who can plan for the future without these incentives, well in advance," said Rakesh Nangia, Managing Partner at Nangia & Co.

dna has learnt that effective tax rate is only around 23% as against the statutory rate of 32-33%, as per 2015-16 budget documents. These exemptions stood at more than Rs 62,000 crore of the government revenue.

"With proposed reduction in corporate tax, companies can reduce the price at which they sell their products. This will increase consumer spend and, in turn, the demand for goods and services," said a former revenue department official.