The latest increase in the coverage of the concessional 25% rate, which was initially for small enterprises, will leave around 6,000 companies in the top tax bracket as their revenues exceed Rs 400 crore a year.
In the 2015-16 Budget, the government had lowered the rate for businesses with annual turnover of up to Rs 50 crore, which then covered 96% of the entities paying corporation tax. The limit was subsequently raised to Rs 250 crore, which has now been hiked further and covers 99.3% companies filing returns.
The corporate sector has been seeking an overall lowering of the rate in line with the government’s promise to bring it down to Asean levels of 20-24%, something it has failed to act upon so far. The demand has only increased after countries led by the US eased the burden in recent years. Several startups have been preferring to relocate from India or set up shop in countries such as Singapore, citing higher tax rates apart from higher compliance burden.
Government officials, however, indicated that there was little headroom to reduce the corporate tax rate for all companies given that a one percentage point reduction in rates results in a Rs 15,000 crore loss to the exchequer.
Although the headline rate is higher, the effective rate for several companies is much lower given that there are a plethora of exemptions available to companies. In 2017-18 fiscal year, the average effective rate worked out to 29.5% against an average statutory rate of 34.61%. If the dividend distribution tax was also factored in, the average effective rate worked out to 32.15%.
From the government’s point of view, the good news is that the effective rate, excluding dividend distribution tax, inched up from 26.9% in 2016-17 due to the gradual phasing out of profit-linked deductions and the levy of minimum alternate tax on companies.