FM kick started the phase out of exemptions to corporate taxpayers by restricting the reduction in Corporate Tax rate to small companies. On the much anticipated corporate tax front, Mr. Jaitley restricted himself to a marginal 1 per cent reduction in corporate taxes for existing small firms.

 

The finance minister announced

• Lower corporate tax of 25 per cent plus surcharge and cess
• For new manufacturing companies which are incorporated on or after 1st March, 2016 provided they do not claim other exemptions (do not claim profit-linked or investment-linked deductions and do not avail of investment allowance and accelerated depreciation)
• Also lowered the corporate income tax rate to 29 per cent plus surcharge and cess for companies with turnover not exceeding Rs 5 crore.

 

The revised corporate tax rate is for relatively small enterprises i.e. firms with turnover not exceeding Rs 5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.

 

Justifying not lowering the tax rates for big companies this year, the Minister said the benefits of phasing out corporate tax exemptions would be available to the government only gradually. The exemptions that are proposed to be phased out include accelerated depreciation and benefits available to special economic zones.

 

In last year’s Budget, Jaitley had announced reduction in corporate tax rate to 25 per cent over four years from 30 per cent at present along with simultaneous withdrawal of exemptions.

 

Phasing out of exemptions will reduce litigation and make Indian companies more competitive globally, while taking up government revenues over the years as effective tax rates go up.

 

The reduction will subsequently phase out the tax exemptions given to special economic zones (SEZs), production of natural and mineral oils, export-import benefits.

 

This move is intended to provide the much needed boost to the manufacturing sector and the ‘Make in India’ initiative of the government, considering the capital-incentive nature of the manufacturing industries, the benefit of reduced rate may be of little help in the initial years. Thus, the companies may prefer to claim the deductions and incentives which may result in reduced effective tax rate rather than opting for lower rate of tax.

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