Consultants comment on provisions of the new tax cuts

Following the announcements of corporate tax cuts, senior executives from Deloitte and Grant Thornton have indicated that companies might not rush to enter the new tax regime, primarily due to the provision that accumulated Minimum Alternate Tax (MAT) can no longer be used under the new scheme. 

The Ministry of Finance announced substantial tax cuts in late September, in an attempt to promote domestic business. Corporate taxes were slashed from 30% to 22%, which excludes special benefits that were introduced for the manufacturing sector and companies that already enjoy certain exemptions and benefits.

For the manufacturing sector, corporate tax is now down to 15%. Companies that already enjoy tax exemptions do not benefit from the tax cuts, although these companies will now pay MAT at 15% instead of 18%. Those companies that do benefit from the slashed rates, however, cannot use accumulated MAT, according to the Economic Times (ET).

In light of these conditions, companies have an option to opt for either the old tax regime or the new one. Those with a high level of accumulated MAT are expected to continue in the old regime until their MAT is exhausted, following which they will switch to the new regime and enjoy the cuts.

Senior tax consulting executives have indicated that the new policies have been put in place to favour new companies, rather than established ones. While India has a booming business environment that has driven economic growth, domestic production still falls short of internationally competitive levels. 

The government is looking to incentivise the emergence of new businesses to boost local production. Initiatives such as the Goods & Services Tax and the Make in India campaign have all been aimed in this direction, while the latest move makes the priorities crystal clear going forth.

“This option (switchover to lower rate) can be exercised any time so taxpayers can exhaust these carry forwards and then shift to the beneficial tax regime,” said National Leader for Tax at Grant Thornton Vikas Vasal.

Rohinton Sidhwa, Parther at Deloitte India added, “This could be a huge cost to some companies that will perhaps consider continuing under the old regime for the time being. The one-time transition costs, requirement for fresh investments and other hurdles posed for existing taxpayers are significant enough to dent benefits intended in the original announcement.”