The general public and, unexpectedly, a segment of the intelligentsia had the notion that corporate tax rates were drastically reduced and computations were simplified in 2019, right after the NDA government led by Narendra Modi retook power with a landslide victory.
Absolutely nothing could be further from the truth.
Consider the befuddling and perplexing number of various corporation taxation regimes briefly outlined below.
Basically, there are two optional schemes—section 115BAA and section 115BAB—neither of which can be disowned once embraced.
The other common features of the two are they are in lieu of all the tax incentives and exemptions including the accelerated 100 percent depreciation prescribed for select industries from time to time.
In addition, the right to carry forward unabsorbed depreciation and losses has to be foresworn.
Under the first, tax rate is 22 percent plus 10 percent surcharge and 4 percent education and health cess on the tax as increased by surcharge for a domestic company engaged in any business.
Under the second, tax rate is just 15 percent plus 10 percent surcharge and 4 percent education and health cess on the tax as increased by surcharge for a domestic company set-up and registered on or after the first day of October, 2019, and has commenced manufacturing or production of an article or thing on or before the 31st day of March, 2023 (extended till March 31 2024 by Finance Bill 2022) and the business is not formed by splitting up, or the reconstruction, of a business already in existence.
Both the schemes spare their adherents from the tyranny of minimum alternate tax (MAT). This is no big deal because MAT has been a riposte to companies that thumb their noses at the taxman by availing of tax benefits.
No tax benefits claimed, ergo no MAT which lays its overreaching hands on book profits
If a domestic company does not want to foreswear tax incentives and carry forward of losses it has to pay 30 percent tax but if its turnover/gross receipts for the financial year 2018-19 did not exceed Rs 400 crore, it can pay 25 percent for eternity.
In addition, surcharge at the rate of 7 percent 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 income tax becomes 12 percent.
A surface and superficial impression has been created that the Indian corporate tax rate is already at the benign, minimum 15 percent level as agreed to 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 on or before March 31, 2023 (on or before March 31, 2024 as per the Finance Bill 2022) besides agreeing to some 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 pitch their tents firmly in India though Indian promoted companies too are eligible for the soft rate.
Will the government keep on extending the deadline for commencement of manufacture beyond March 31, 2024 or is it now cast in stone? There is no way existing Indian companies can jump into the bandwagon by floating a fresh company because the scheme puts its foot down on the new company using old assets.
And even for the ones who make the grade the unkindest cut is bar on carry forward of unabsorbed depreciation and losses given the fact that manufacturing inevitably gives rise to such losses during the gestation period. The bottom line is they have to pay tax of 15 percent plus despite such huge accumulated losses.
The 22 percent plus regime beckons companies who are mature and have no growth, expansion or diversification opportunities and aren’t nursing accumulated losses. So, both the 15 percent and 22 percent schemes hold appeal but to very few companies. Yet one is made to believe that the entire corporate tax exercise is a walk through the park!
If a company doesn’t want to forego incentives and the right to carry forward of losses, it has to willy-nilly pay 30 percent plus tax unless it was fortunate in the financial year 2018-19 to record a turnover/gross receipt of Rs 400 crore or less in which case it would be cossetted with a 25 percent plus tax in eternity. This is strange to say the least. What is the sanctity behind the 2018-19 cutoff year? Why should it hold sway for all times to come in future?
Who are we lulling into complacency and fostering the delusional belief that everything is hunky-dory? Why are we living in a cuckoo land? The tradeoff for lower tax—-forgo and forget incentives, exemptions and past losses—is foolish, counterproductive and counterintuitive especially when there is an urgent need more than ever before to ramp up investments and employment opportunities on the back of such incentives and exemptions.
In fact, the Economic Survey 2022 clearly is rooted in the belief that capex of private sector would revive alongside government investments in infrastructure.
And it is patently unfair to ask one to forget his past losses. If they are sizeable, a company would not fall into the trap of the illusory schemes.