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2023 | OriginalPaper | Chapter

9. Recent Reforms in India’s Corporate Income Tax Regime: Rationale, Impacts, and Improvements

Author : Supriyo De

Published in: India’s Contemporary Macroeconomic Themes

Publisher: Springer Nature Singapore

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Abstract

In a recent innovative policy reform, India’s corporate income tax system was overhauled with optional lower rates in lieu of giving up complex deductions. However, official data reveals a puzzle wherein larger companies have opted more for the lower optional rates, while smaller ones appear reticent in switching to the optional regime. This paper explores this issue using empirical methods. The evolution of tax rates is tracked through reforms simplifying the tax system in the 1990s, the subsequent conundrum of zero-tax companies leading to the introduction of minimum alternate tax, and the persistence of lower effective tax rates for larger companies. This provides the rationale for a simpler tax regime with lower rates but fewer deductions. The user cost of the capital approach is used to examine the economically relevant tax impact across various sectors and ownership types. The results indicate that in terms of user cost, the various lower tax options are not attractive, and under certain situations may be worse for younger and smaller companies. In light of the analysis, policy options are suggested to improve the scheme so as to achieve the laudable objective of implementing a simple tax regime with lower rates and minimal deductions.

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Footnotes
3
“Book profit” for this purpose is net profit as per profit and loss accounts prepared as per corporate law PLUS: income tax paid/payable; amounts carried to reserves; provisions for unascertained liabilities and losses of subsidiaries; dividends paid/proposed; expenditures related to certain exempt incomes; expenditures related to tax-free AOP or BOI; for foreign company expenditures related to capital gains on securities or interest; royalties, etc.; notional loss on transfer of specified capital assets; expenditure related to specified patent royalties; depreciation debited to P&L a/c; deferred tax and provision thereof, etc. LESS (if the amounts are credited to P&L accounts): Amounts withdrawn from reserves or provisions; specified exempt incomes; depreciation credited to P&L a/c; incomes related to tax-free AOP (Association of Persons) or BOI (Body of Individuals); for foreign company incomes related to capital gains on securities or interest; royalties, etc.; notional gain on transfer of specified capital assets; income related to specified patent royalties; profits of sick industrial company till its net worth becomes zero/positive; deferred tax if credited, etc.
 
4
Further, as per Explanation 4 to Section 115JB as amended by Finance Act, 2016, with retrospective effect from 1/4/2001, it is clarified that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if.
  • (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-Section (1) of Section 90 or the Central Government has adopted any agreement under sub-Section (1) of Section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or.
  • (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.
Further, as per Explanation 4A to Section 115JB as inserted by Finance Act, 2018, MAT provisions shall not be applicable to a foreign company, whose total income comprises profits and gains arising from business referred to in Section 44AB, 44BB, 44BBA, or 44BBB and such income has been offered to tax at the rates specified in those sections.
 
5
The economic and tax depreciation rates, and asset-wise UCCs can be made available on request.
 
6
Due to the small sample size, we do not report mining industry figures. However, the UCCs are available in Annexure 2.
 
7
Income Tax Department, Government of India. https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?path=https://www.incometaxindia.gov.in/charts++tables/tax+rates.htm&k&IsDlg=0.
 
8
The surcharge shall be subject to marginal relief, which shall be as under.
(i) Where income exceeds Rs. 1 crore but not exceeding Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
(ii) Where income exceeds Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.
 
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Metadata
Title
Recent Reforms in India’s Corporate Income Tax Regime: Rationale, Impacts, and Improvements
Author
Supriyo De
Copyright Year
2023
Publisher
Springer Nature Singapore
DOI
https://doi.org/10.1007/978-981-99-5728-6_9