India’s decision to slash corporate tax rates gives companies a choice— give up the lower rate or what may be valuable tax exemptions and incentives.
Companies will have to do the math to decide if the permanent move makes sense.
The tax cut announced Sept. 20 by Finance Minister Nirmala Sitharaman comes with a condition. Domestic companies can have their headline tax rate cut to 22% from 30%, but will have to give up their exemptions. Their effective tax rate would still be 25.17%, when including the social security surcharge and education taxes. The new tax structure is effective from April 1, 2019.
If companies opt to keep their exemptions, they can’t take advantage of the lower rate. Their decision will be permanent.
Some companies have welcomed the reduction, which will mean they pay significantly less tax. But others already pay lower than the new 22% rate through various exemptions and incentives, and won’t benefit from the cut.
Amit Gupta, director of tax at Dell Global B.V., said he thinks most companies will choose the lower rate. But “everybody will need to do the math,” he said. “Are they above or below 25%? If they are below 25%, I think they will stick with the exemptions.”
Some tax incentives are very generous, and not all companies may want to take the lower rate, said Frank D’Souza, partner and national corporate and international tax leader at PwC India.
If companies accept the lower corporate rate, the types of incentives they will lose include tax holidays, weighted deductions for research and development, and accelerated depreciation, he said. “These are not insignificant items,” he added.
Bigger Bonus for Certain Sectors
Because of the way the Indian government has previously used exemptions to encourage growth in certain sectors and regions, the relative benefit felt by the new tax cut—which applies to all sectors—is unequal.
Service-sector companies, for example—barring those that are in a tax holiday—will mostly benefit from taking the lower rate because they wouldn’t have many other ways of reducing their rates, D’Souza said.
The lower corporate rate will also be a boon for banks, most of which have effective tax rates around 33%-35%, said Anand Jaiswal, senior manager — corporate taxation at Infosys Ltd.
Companies in the information technology sector may be less likely to take up the lower tax rate, though. “Many IT Sector companies enjoy tax holiday due to their operations from Special Economic Zone (SEZ),” said Jaiswal, whose company is a leader in the sector.
Nonetheless, most companies will take advantage of the tax cut and give up their exemptions, to simplify processes and avoid disputes, Dell Global’s Gupta predicted.
“It’s much simpler, correct. If you don’t claim exemptions there’s nobody who’s going to challenge you,” he said. “When you use exemptions you have to go through regular documentation and all of that.”
“India had already removed most incentives from the tax code, and most of the ones that remain are sectoral. The move will help reduce distortions and create simplified uniform basic tax rate across the board,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
S. R. Patnaik, partner and head of tax in the Delhi office of law firm Cyril Amarchand Mangaldas, added that most “tax benefits/incentives are anyways approaching their sunset.”
India hasn’t decided on cuts to personal taxes, Finance Minister Nirmala Sitharaman said at a briefing on Sept. 22.