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Concessional Corporate tax rate regime

  • Category
    Economy
  • Published
    18th Apr, 2022

Context

Under the new regime introduced, a tax rate of 15 per cent was announced under Section 115BAB for newly incorporated domestic companies, which make fresh investment by March 31, 2023, for manufacturing, production, research or distribution of such articles or things manufactured.

  • This was extended by one year in the Budget of 2022-23 till March 31, 2024.

Background

  • The corporate tax is levied on both the public and private companies registered under the Companies Act of 2013.
  • The rate at which the tax is imposed as per the provisions of the Income Tax Act, 1961 is known as the ‘Corporate Tax Rate’.
  • The Taxation Laws (Amendment) Bill, 2019 caused a reduction in the base corporate tax rate, that is, from 30 percent to 22 per cent for the existing businesses which led to revenue inference of INR 1.45 Lakh Crores.
  • While, in case of new manufacturing firms that have been established post 1st October, 2019 and prior to 31st March, 2023, the base corporate tax was reduced from 25 per cent to 15 per cent.
  • This strategic action could possibly enhance the comparative adversaries of India’s corporation tax rates with other Asian nations.
  • The new corporate tax rates in India is much lower than USA (27%), Japan (30.62%), Brazil (34%), and Germany (30%) and for the new firms the tax rate is similar as of Singapore (17%).

Key points of the regime

  • Paving Way for Taxes: It paves way for levies on Multinational Companies (MNCs) in countries where they operate, instead of just where they are headquartered.
  • Countries’ Right to Tax: countries where big firms operate would get the right to tax at least 20% of profits exceeding a 10% margin which would apply to the largest and most profitable multinational enterprises.
  • Efforts by OECD: The Organization for Economic Cooperation and Development (OECD) has also been coordinating tax negotiations among 140 countries for years on rules for taxing cross-border digital services and curbing tax base erosion, including a global corporate minimum tax.

What is corporate income tax?

In India, the Corporate Income tax rate refers to the highest effective rate for Corporate Income for domestic companies. Its amount is based on the net income companies obtain while exercising their business activity, normally during one business year. Revenues from the Corporate Tax Rate are an important source of income for the government of India.

  • A country's corporate tax may apply to:
    • corporations incorporated in the country,
    • corporations doing business in the country on income from that country,
    • foreign corporations who have a permanent establishment in the country, or
    • Corporations deemed to be resident for tax purposes in the country.

What is Global Minimum Corporate Tax Rate (GMCTR)?

  • Corporation tax: It is a direct tax imposed on the net income or profit that enterprises make from their businesses.
  • The G7 Finance Ministers have called for a global minimum corporation tax rate of at least 15%.
  • Need of a Global regime:
  • Bringing Equality: In the Indian context, the GMCTR will bring equality to those people may be operating in India but not located in India and therefore not paying any taxes.
  • Attract Investments: India is likely to benefit from the global minimum 15% corporate tax rate pact as the effective domestic tax rate (other than in Special Economic Zones) is above the threshold.
  • In all probability the concessional Indian tax regime would still work, and India would continue to attract investments.
  • India at Advantage: Due to India’s tax rates too, it will be in an advantageous position because Indian tax rates have come at a position where India can afford to give concessions to big companies and yet not fall down at the international tax rates.
  • Challenge: Although the 15% GMCTR will not affect the current investments in India, setting up more SEZs or giving incentives to companies to invest in India will be a challenge.

Issues involved regarding corporate tax regime

  • Bringing Global Consensus: Bringing all the major nations on the same page, especially since the pact impinges on the right of the sovereign to decide a nation’s tax policy.
  • A global minimum rate would essentially take away a tool that countries use to push policies that suit them.
  • Issues to Smaller Countries: Countries like Ireland, which has a tax rate of 12.5%, has come out against the global minimum tax, arguing that it would be disruptive to its economic model.
  • Issues to Developing Countries: IMF and World Bank data suggest that developing countries with less ability to offer mega stimulus packages may experience a longer economic hangover than developed nations.
  • Considering the countries like Bangladesh which do not have too many advantages to offer besides a Special Economic Zone, this decision of G7 countries might not be very conducive.
  • Tackling Tax Evasion: A lower tax rate is a tool the countries can use to alternatively push economic activity. Also, a global minimum tax rate will do little to tackle tax evasion.
  • Rigidity in Rules: Once an international commitment has been made for 15%, it will be very difficult for the national governments to say who stays on 15% and who doesn’t. It will introduce rigidity in the rules which might not be as favourable for countries’ economies.

Benefits of corporate tax in India

  • For existing companies- Under the new tax slab, corporations with annual turnover up to Rs 400 crore and not seeking any incentives or exemptions need to pay 22 per cent tax along with applicable cess and surcharge.
  • This takes the effective corporate tax rate to 25.17%. However, with the introduction of the new guidelines, companies don't have to pay any minimum alternate tax or MAT.
  • Benefits- make existing firms able to negotiate with new firms in the market.
  • For new firms- The government, in order to attract fresh investment in manufacturing and provide a boost to its flagship ‘Make-in-India’ initiative which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%.
  • This benefit is available to firms which do not avail any exemption/incentive and commences their production on or before 31st March, 2024.
  • The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess and such companies shall not be required to pay Minimum Alternate Tax.
  • Benefits- It will attract fresh investments in India with several exemptions from taxes in the market. It will increase competitiveness of the market.
  • For foreign companies- Corporate tax rates for foreign companies depend on the agreement of India with the country where the company is based. The rate can be divided into two sections:
  • If the income is shown as any royalty or fee for technical services received by a foreign company from an Indian concern or Indian government as per any agreement made before April 1, 1976 which is approved by the central government, the company has to pay a tax rate of 50%.
  • Another 40% tax will be imposed on the company if it has other sources of income. Adding to it, a surcharge of 2% is levied if the income is between Rs 1 crore to Rs 10 crore. In case it exceeds Rs 10 crore then the applicable surcharge is 5%.
  • Benefits- foreign companies will get extra concessions as compared to other nations, and hence India will get more FDIs and Foreign currency for revenue generation.

conclusion

The concessional corporate tax regime is a forward step towards tax profiling and invasion in India. Since after COVID now stringent and strategic policies for every economic move is concerned and scrutinized. Hence, India is now going in lines with the US for relaxing its tax regimes to increase Investment and achieve GDP growth targets.

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