The illusion of a low corporate tax rate persists for the fourth consecutive year

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An impression circulated among ordinary people and surprisingly among a section of connoisseurs that corporate tax rates were significantly lowered and calculations simplified in 2019 immediately after the NDA government under Narendra Modi resumed its rule with an overwhelming majority . Nothing could be further from the truth. This is evidenced by the bewildering and bewildering array of alternative regimes governing corporate taxation briefly outlined below.

Basically, there are two optional regimes – Section 115BAA and Section 115BAB – neither of which can be disallowed once adopted. Other common features of both are that they replace all tax incentives and exemptions, including the 100% accelerated depreciation prescribed for certain industries from time to time. In addition, the right to carry forward unabsorbed depreciation and losses must be waived.

According to the first, the tax rate is 22% plus a 10% surcharge and an education and health tax of 4% on the tax, plus a surcharge for a domestic company engaged in commercial activity. According to the second, the tax rate is only 15% plus 10% surcharge and 4% education and health tax on the tax plus a surcharge for a national company created and registered on October 1, 2019 or later, and commenced manufacture or production of an article or thing on or before March 31, 2023 (extended to March 31, 2024 by the Finance Bill 2022) and the business is not formed by splitting off or rebuilding an already existing business.

Both regimes spare their adherents the tyranny of the Alternative Minimum Tax (MAT). That’s okay because MAT was a response to companies that thumb their noses at the taxman by taking advantage of tax breaks. No tax benefits claimed, so no MAT that gets its hands on accounting profits

If a domestic company does not want to give up tax incentives and carry forward its losses, it must pay 30% tax, but if its turnover/gross revenue for the financial year 2018-19 did not exceed 400 crores of rupees, she can pay 25% for eternity. In addition, a surcharge at the rate of 7% of the tax is payable if the total income of a domestic company exceeds Rs 1 crore but does not exceed Rs 10 crore and if the total income exceeds Rs 10 crore, the surcharge on the income tax becomes 12 percent.

A superficial and superficial impression has been created that the Indian corporate tax rate is already at the benign level, minimum of 15%, as agreed last year by OECD members. The devil as usual in the details. A company should have been incorporated in India on or after October 1, 2019 and must commence manufacturing operations no later than March 31, 2023 (no later than March 31, 2024 as per the Finance Bill 2022) in addition to accepting certain stifling conditions in order to make the grade for 15 percent tax. This was clearly a make-in-India pitch to entice foreign companies to firmly pitch their tents in India, although Indian-promoted companies are also eligible for the reduced rate.

Will the government continue to extend the deadline to start manufacturing beyond March 31, 2024 or is it now set in stone? There is no way existing Indian businesses can jump on the bandwagon by starting a new business because the program is stepping on the new business using old assets. And even for those who do get the grade, the cruelest cut is the ban on carrying forward depreciation and unabsorbed losses since manufacturing inevitably entails such losses during the gestation period. In the end, they have to pay a tax of more than 15% despite these huge accumulated losses.

The 22% plus regime attracts businesses that are mature and have no opportunities for growth, expansion or diversification and are not incurring accumulated losses. Thus, the 15% and 22% regimes are attractive, but for very few companies. Yet, one is led to believe that the whole corporate tax exercise is a walk in the park!

If a company does not want to give up incentives and the right to carry forward losses, it must pay willy-nilly 30% plus tax unless it has been lucky enough to record a turnover/gross receipt of Rs during the 2018-19 financial year. 400 crores or less, in which case it would be covered by a 25% plus tax in eternity. It’s strange to say the least. What is the sanctity behind the cutoff year 2018-19? Why should it prevail for all time to come?

Who are we lulling into complacency and harboring the delusional belief that all is well? Why do we live in cuckoo country? The trade-off for lower taxes — giving up and forgetting past incentives, exemptions, and losses — is foolish, counterproductive, and counterintuitive, especially when more investment is urgently needed than ever. and employment opportunities on the back of such incentives and exemptions. In fact, the 2022 economic survey is clearly rooted in the belief that private sector investment would revive alongside public investment in infrastructure. And it is patently unfair to ask someone to forget their past losses. If they are consistent, a company would not fall into the trap of illusory patterns.

(The author is a seasoned columnist and tweets @smurlidharan)

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Posted: Tuesday 01 February 2022, 12:47 IST

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