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Corporate Tax Rate - To Cut Or Not To? What Will New FM Do?

Author: Balwant Jain/Wednesday, June 26, 2019/Categories: Corporate Tax

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Corporate Tax Rate - To Cut Or Not To? What Will New FM Do?

Will the new Finance Minister cut the tax rates for large companies from the current 30 per cent to 25 per cent in the Budget 2019, a promise made by her predecessor Arun Jaitley in Budget 2016? While expectations may be running high, the government may not give any relief to large companies. In the 2017 Budget, tax rate for smaller companies having turnover of up to Rs 50 crore was reduced to 25 per cent. In Budget 2018, the 25 per cent tax rate benefit was extended to companies with turnover of up to Rs 250 crore. Currently, almost 99% of the companies are covered under the 25 per cent tax regime. As per the finance ministry data, of the seven lakh companies which file their ITR only 7,000 companies are outside the scope of the 25 per cent tax regime thus leaving only 1% companies outside the expanded base. Large companies eagerly waited for a reduced tax rate in the previous two Budgets. Will it happen in 2019 Budget? The chances are bleak. Here’s why: The total income tax paid by top 100 companies is around Rs 1.77 lakh crore against overall collection of Rs 10.21 lakh crore constituting around 17 per cent of total income tax collection which is a substantial number. If the remaining companies are brought under 25% regime, back of the envelop calculation shows that the government will lose Rs 30,000 crore.

Revenue side constraint

One of the key reasons that could stop the FM from cutting tax rate for large companies is due to economic slowdown and consistent decline in GDP growth. GDP is not growing at the same rate as it did in 2016 when the promise to cut corporate tax rate was made. GDP is expected to grow at 6.75% as against 7.65% recorded in the first half of 2019, indicating economic slowdown. With slower growth, tax collections could also be lower. In addition, reduced GST collections as against the projected figures is one other reason that curtails the government from cutting corporate tax rate. The numbers for 2018-2019 show that gross central GST was at Rs 4.25 lakh crore, Rs 78,000 crore short of targeted figure. The government wants to shore up its tax collections to fund Ayushman Bharat. For 2019-2020, the government has raised the allocation for the programme to Rs 6,700 crore from Rs 2,400 crore in 2018-19. The government would need more money to finance the PM Kisan scheme. This can be achieved with higher tax collections. The cream of 7,000 companies contributes a lion’s share of corporate tax collection. Any cut in tax rate for large companies can hurt its welfare plans.  (The author is tax and investment expert and can be reached at jainbalwant@gmail.com)

 

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