Tax policies and their proper implementation play a key role in driving business growth. The main grievance of the businesses today is high tax cost leading to increased cost of production and resultant lower surplus for reinvestment and expansion. The Hon’ble Finance Minister while presenting Budget 2015-16 promised that the rate of corporate tax will be reduced from 30 per cent to 25 per cent over the next four years with corresponding phasing out of exemptions and deductions. The Finance Act, 2016 has phased out many exemptions and deductions available under the Income Tax law, however, the rate of tax has been reduced to 29% only for domestic companies with a specified turnover. The marginal reduction has not made any impact on the growth of Indian businesses. The Government needs to reduce the corporate tax rate significantly in the upcoming budget across the board to have any tangible effect on the growth of the business.
Benefit of reduction on tax rate not commensurate with the phased out deductions & exemptions
The rate of tax for firms and limited liability partnerships is considerably high inspite of the fact that most of the deductions and exemptions phased out last year affected companies as well as firms and Limited Liability Partnerships (LLPs). However, the benefit of reduction of tax rate was not passed on to such other taxpayers. The rate of tax should not decide the way a businessman wants to conduct his business. The tax rate for firms and LLPs need to be reduced to 25% in sync with the reduction in corporate tax rate and phasing out of deductions and exemptions. This would facilitate ease of doing business in any form and not particularly restrict the benefit to corporates.
MAT needs to be phased out in Budget 2017
Another important aspect to be considered due to phasing out of deductions and exemptions is the reduction in the rate of Minimum Alternate Tax (‘MAT’). MAT was introduced to neutralize the impact of incentives available to the taxpayers. With phasing out of incentives, the Government should consider reducing the burden of MAT on the taxpayers and MAT should eventually be phased out.
Budget should focus up on incentives needed for investment in R&D
A proposed cut in tax rate will alone, however, not be sufficient to support the growth path envisioned for Indian businesses. We need world class products to be manufactured in India to increase our exports. This can happen if incentives are provided to investment in research and development. The Government in the last budget has reduced the quantum of weighted deduction and even phased out weighted deduction, available in respect of expenditure incurred on scientific research through various modes. Indian residents are paying huge sums by way of fees for providing technical services to foreign technicians to upgrade their products and give the customers what latest technology gives globally. If In-house research is continuously encouraged, outgo on account of fees for technical services will reduce and this will help indigenous businesses to grow. The Government should continue the weighted deduction available under the Income Tax Law at present to various modes of scientific research.
Government can consider granting research tax credits
The Government can also consider introducing benefits in the form of research tax credits which can be used to offset future tax liability (similar to those given in developed economies). Some countries also allow a cash refund of such credits where the entity’s tax liability does not exceed the available research & development tax credit or by laying down certain qualifying parameters based on entity/group’s turnover threshold. In the Indian context, a similar benefit given especially to MSMEs carrying on R&D activities would be indeed useful.
Extend the period of investment allowance
Apart from investment in research and development, Indian corporates need to make large investments in the plant and machinery required to manufacture world class products. The Government had introduced a provision in the Income Tax Law to allow deduction in the form of investment allowance to manufacturing companies who made investment in new plant and machinery for more than Rs. 100 crores during the financial years 2013-2014 and 2014-2015. The Government via Finance Act, 2014 had extended the benefit, for investment made in plant and machinery upto March 31, 2017, if such investments are more than Rs. 25 crores in a financial year.
This measure, is no doubt laudable, however, the benefit gets diluted on account of levy of MAT. With a view to give impetus to manufacturing in India, exemption from MAT should be provided on the amount of deduction claimed by the company towards investment allowance. Secondly, the minimum limit of investment in new plant and machinery for a company to claim investment allowance is Rs. 25 crores. However, Micro Small and Medium Enterprises (‘MSMEs’) have not been able to avail the benefit of investment allowance because as per the regulation governing MSMEs, the limit of defining MSMEs in manufacturing sector is based on their investment in plant and machinery which has an upper ceiling of 10 crore.
The Government should consider extending the benefit of investment allowance beyond March 31, 2017 and investment limit for MSMEs should be reduced suitably to enable them to take the benefit of investment allowance.
As every year, FICCI has given recommendations on tax related matters in its Pre Budget Memorandum 2017-2018 submitted to the Government. It is hoped that the Government will take appropriate action on the above issues which indeed can help to revive the growth of the businesses in India.