India Markets closed

Budget 2019: Will it be favourable or disappointing to India Inc?

Budget 2019, Union Budget 2019 India, Budget 2019 India, Budget 2019-20,taxpayers, Corporate tax rate, Finance Minister, Dividend Distribution Tax, MAT

Union Budget 2019 India: The Interim Budget FY20 brought in relief for the small and marginal taxpayers as the then acting Finance Minister announced the extension of tax rebate to include people with taxable income up to Rs 5 lakhs. Even though reduction in Corporate tax rate was a highly anticipated move, the interim budget had disappointed India Inc.

So now as the newly appointed Finance Minister invited suggestions from India Inc for Budget FY20. There is a budding hope that the Union Budget 2019 might take care of the woes of India Inc. As a result most of the recommendations received are reduction in rate of corporate tax, reduction of Minimum Alternate Tax and reduction in dividend distribution tax.

The Finance Minister in his FY16 Budget speech had promised to reduce the basic rate of Corporate Tax from 30% to 25% progressively in 4 years. The benefit of plunge in tax rate was enjoyed by the small and medium sized companies which was incorporated gradually in 2 years. Since then all the large companies are lobbying for the rate cut.

Presently Minimum Alternate tax (MAT), which is levied on businesses, is calculated at 18.5 per cent on book profits. It attracts surcharge and cess. India Inc wants it to be reduced to 10 per cent. Currently MAT credit can be carried forward for 10 years, the industry has demanded for extension of this period to 15 years.

Dividend Distribution Tax is levied on company, plus additional dividend tax is levied on the shareholder who receives dividend in excess of Rs 10 lakhs. India Inc wants this double taxation to be discontinued and that tax should be levied in the hands of shareholders only rather to the company. In an ideal world, this would increase amount of Dividend distributed to the public and finally more free cash in the hands of low income tax group.

Between 1985 to 2018, the average global corporate tax rate has fallen by more than half, from 49 per cent to 24 per cent. The corporate tax rate in India is 35% inclusive of surcharge and cess which is the highest among the BRICS and also among other Asia-Pacific countries.

Post election results, The Ministry of Finance has moderated the tax collection targets of smaller cities while increasing it for the bigger centres like Mumbai and Delhi for financial year 2019-20. But no revision has been made to the budgetary target that was announced in the Interim Budget.

Further the economy is in a slowdown. The economic growth rate recorded in January-March 2019 quarter was 5.8% which happens to be the lowest recorded so far in the past five financial years. As per the Central Statistics Office (CSO), the growth in gross domestic product during the 2018-19 fiscal stood at 6.8 per cent, lower than 7.2 per cent in the previous financial year. So the primary focus of the government is expected to be areas, the growth of which will come as a boost to the already sluggish economy.

India being a traditional Agrarian Economy absorbing most of the nation's employment, bringing reforms in that sector would be as good as killing two birds with one stone. As hinted by the former Finance Minister earlier rural sector, infrastructure, real estate, employment and banking sector are on the priority list of the government. But as a matter of fact Foreign Direct Investment plays an important role in the economic development of a country. The capital inflow of foreign investors allows strengthening infrastructure, increasing productivity and creating employment opportunities which are the points in focus for the government currently.

Most Indian companies are lagging behind both in terms of International competition and attraction of foreign investment. In the latest world investment report it is revealed that Asia accounted for 39% global foreign direct investment, most of which went in favour of China. China's corporate tax rate is 25% which gives it an edge over India in terms of Foreign Direct Investment. It is clear that bringing down the tax rate would enable companies to have greater surplus for investment in capacity expansion and augmentation of business which in turn would aid in fetching Foreign Investment and would enable India Inc to emerge as a strong competitor in the global arena.

The interim budget primarily focused on Personal Income Tax rather than Corporate Tax. This brings a ray of hope for India Inc as Union Budget 2019 might focus on Corporate Tax matters.

FY20 being the last year of the timeline set by the past Finance Minister for progressive reduction in Corporate tax rates, it would be interesting to see whether the government keeps its promise or disappoints India Inc once again.

(By Gaurav Mohan, CEO, AMRG & Associates)