60% of firms move to lower tax regime

Around 60 per cent of taxpaying companies have moved to the government’s offer of a lower corporation tax regime, according to initial estimates of the income-tax department. In absolute terms, around 300,000 companies are now at the 22 per cent rate, against the earlier 25-30 per cent earlier.

The finance minister announced the option in September, with a shift to the lower tax regime being contingent on a company forgoing specified exemptions and incentives.

With this, the government is expecting around ~1 trillion of forgone revenue in 2019-20, less than the initially estimated loss of ~1.45 trillion. Around ~10,000 crore of revenue loss is estimated on account of a lower minimum alternate tax (MAT) rate, of 15 per cent, from 18.5 per cent.

“While initial estimates suggest around 60 per cent of taxpaying companies have moved to the new corporation tax regime, a more realistic picture will emerge in December, once we get the third instalment of advance tax,” said a government official.

In Assessment Year 2018-19, around 842,000 returns were filed by companies. Of these, 342,000 paid no tax, leaving a taxpaying lot of 500,000.

In this year’s Union Budget, the rate on firms earning up to ~400 crore was brought down to 25 per cent.

That left only 0.7 per cent in the 30 per cent category in this year’s Budget.

Currently, the total tax burden after surcharges and cess on large companies come to 34.94 per cent. The September offer reduced this to 25.17 per cent. The finance minister had also announced a cut in corporation tax rate to 15 per cent, from 25 per cent, for new manufacturing companies. With cess and surcharges, this comes to 29.12 per cent at present and with the new rate structure that would be cut to 17.01 per cent. These companies also need not pay any MAT.

However, those opting for the lower tax regime will not be allowed to claim accumulated MAT credit.

“It is not necessary that companies with accumulated MAT credit will not move to the lower tax regime. They are weighing the benefits and will take a call based on that,” said the official.

Despite unavailability of MAT credit, early indicators suggest several companies have moved to the lower tax regime.

According to an earlier report in Business Standard, combined tax outgo for the September quarter was down 3.1 per cent year-on-year. As a result, the average effective rate of tax for the sample of 200 firms had declined to 22.9 per cent during the quarter, from 28.5 per cent in the year-ago quarter. The tax cut boosted post-tax earnings by ~3,900 crore, equivalent to 5.6 per cent of pre-tax profit in the quarter.

Revenue Secretary A B Pandey recently told Business Standard the principle behind the new regime is that one comes with a clean slate. “Claiming MAT credit earned during the earlier regime means that you are also claiming certain exemptions. The idea is to have a simplified tax regime,” he’d said.

Pandey added a large number of companies had a tax rate over 22 per cent.” They will take advantage (of the scheme). If some companies do not, as they are already in a beneficial regime, net revenue outgo will be slightly less than (the estimated) ~1.45 trillion,” he had said. Former Reserve Bank of India governor C Rangarajan and D K Srivastava, chief policy advisor at consultancy EY India, have estimated forgone revenue at ~98,579 crore on account of the corporation tax rate cut.