Budget 2016: Expectations on the Corporate Taxation front…

There is not much of a surprise in the corporate taxation front. Firstly, the government has already announced the reduction of the rate of corporate taxation from 30% to 25% in four tranches. Simultaneously, most of the exemptions will also go away and the entire process of tax maintenance and filing will become a lot simpler. Let us look at some of the key demands as far as corporate taxation is concerned.

A time table for reduction in corporate tax rates…

While the previous budget has laid out a broad statement of intent on corporate taxation, this budget is likely to address the specifics of how and in what manner the tax rates will be actually reduced. A reduction in corporate tax rate from 30% to 25% may not be very useful to a large number of corporates as the average tax outgo for India companies is much lower than that. But then a clear-cut time table will surely help.

What companies will be more interested or rather worried about, is the loss of exemptions. Most of the benefits that Indian companies were getting like capital allowance, asset creation allowances, backward area benefits, tribal and hilly area benefits, SEZ benefits and even research benefits will be theoretically withdrawn. This is the area of interest for Indian companies. Obviously, the government will not be able to entirely withdraw benefits like SEZ and research allowance as they will be counterproductive. Therefore, Indian companies will be more interested in the fine print of the withdrawal of exemptions than on the tax rate. More importantly, companies will also want an explicit “Grandfather Provision” which assures Indian companies that the existing exemptions and benefits that are in process will be allowed to continue to their logical conclusion without any interim disruption. This clarity is important for Indian companies.

Hoping for a farewell to MAT…

This is highly likely as the whole idea of MAT was to ensure that companies do not misuse the available exemptions to postpone their tax liability. MAT at 18.5% currently, may not make any sense once the average tax rate is reduced and the exemptions are largely done away with. But if the government has a situation where the rates are reduced in tranches, exemptions are revoked and MAT still continues, then corporates may not be too happy. Here again companies will be more interested in the MAT fine print. Most Indian companies will expect that if withdrawal of exemptions starts in this Union Budget, then ideally it should be accompanied by either a gradual reduction in the rate of Minimum Alternate Tax (MAT ) or its total withdrawal altogether.

Clarity on start-ups and new economy … 

There is a lack of clarity today on a variety of taxation grey areas. Let us take the example of new economy companies. Many traditional retailers have objected that online players like Flipkart and Snapdeal have been operating in the grey area between FDI in retail and FDI in wholesale. This has put them at an advantage versus offline retailers. The government is expected to come up with a definition and clarity on taxation of ecommerce transactions. This will be a major demand of the old economy companies.

Start-ups have been a focus area for the current government. Budget 2016 is expected to be a major prop for the start-up sector in India. Ensuring that funds are easily available for start-up businesses at reasonable cost is a major priority. There is also expectation that start-ups will be given some specific benefits in terms of income tax and service tax as well as simplifying procedures for the same. Special benefits like tax holidays and carry forward of losses for longer periods of time is also on the cards.

Concluding thoughts…

The major expectations for corporates will be largely on the time table for corporate tax reduction and the fine print on the removal of exemptions. The government will have to strike a fine balance here to ensure that the withdrawal of benefits do not impact entrepreneurship and critical R&D. Of course, the start-up package may be something to really watch out for.

For more news and updates on Union Budget 2016, visit Religare Online.

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