Union Budget 2021: RSM India's founder on the corporate taxation wishlist
With the promise of the Finance Minister to a provide a budget like ‘never before’, the Union Budget 2021 to be unveiled on 1 February 2021 is one of the most awaited budgets in years. Suresh Surana, the founder of RSM India, shares his views on what India’s corporate sector is hoping for in terms of corporate taxation.
As the nation emerges from the pandemic and its economic aftermath, it is expected that the primary focus of the 2021 Union Budget will be on reviving growth and employment and laying down the roadmap for restoring the fiscal discipline in a phased manner. Taxation is one key area of the Budget – the following are four expectations on corporate tax:
Extension of Scope under Section 115BAB for New Manufacturing Domestic Companies
Section 115BAB provides an option to pay income-tax at concessional rate of 15% to any new domestic manufacturing company incorporated on or after 1 October 2019 subject to certain terms and conditions. This benefit is available to companies which do not avail any exemption / incentive and commence their production on or before 31 March 2023.
Thus, a company opting for this option would be subjected to an effective tax rate of 17.16% inclusive of surcharge & cess and would not be required to pay MAT. This coupled with the GST implementation has made India a compelling location for manufacturing as several global companies are desirous of broad basing their global manufacturing base to India.
One condition needs to be relaxed to make this provision fully effective. The need to set up a “new manufacturing company” after 1 October 2019 results in denial of the lower rate for the businesses who have existing companies in India but wish to set up a new manufacturing unit under the same company. It would be advisable to extend this benefit to the profits derived from “new manufacturing units” set up on or after 1 October 2019 irrespective of whether a separate company has been set up or not.
There are several provisions of the Income-tax Act where a lower rate applies to certain type of income and this basis can be used for the profits of new manufacturing units as well.
Taxation of Dividends @20% for Resident Shareholders
The optional corporate tax regime has lowered the corporate tax rate to 22% plus surcharge and cess resulting in an effective tax rate of 25.17% in most cases. However, dividends distributed by Indian companies are subject to taxation again in the hands of the shareholders. The tax rate applicable for non-residents on such dividends is 20% plus surcharge and cess under the provisions of the IT Act (which may be further reduced under the Double Taxation Avoidance Agreement).
However, in case of resident individuals/ HUFs and partnership firms/LLPs, such dividends are taxed as per slab rates/ applicable rate and can be as high as 35.88%. This results in an effective tax of 52% on profits earned by the companies and distributed to the shareholders. There is a need to reduce this rate to 20% (or lower in case of taxpayers subject to the lower income slabs) in case of resident shareholders as applicable to non-residents.
Deduction in respect of employee costs – Section 80JJAA
With an intent to boost the employment generation for all sectors, the Finance Act of 2016 introduced section 80JJAA in order to provide a deduction of 30% of additional employee cost for three assessment year to all assesses who are audited under section 44AB. However, such deduction has been restricted only in case of employees drawing salaries or wages up to Rs. 25,000 per month which has limited the benefit of the provision as several employment intensive businesses have workforce drawing remuneration exceeding the above threshold.
The past year has witnessed a severe cut in the jobs due to the nationwide lockdown. Hence, there is a dire need to boost the employment generation as it is a key to economic growth and development.
In view of the above, it is expected that the limit of emoluments be increased to Rs. 50,000 a month from Rs. 25,000 per month. Further, it would be more appropriate to extend the benefit of the overall employee cost at a reduced rate of 10% instead of 30% of the additional employee cost since job retention is as important as new job creation.
Elimination of Notional Taxation of Stock under House Property for Builders and Developers
Section 23(5) of the IT Act provides for the taxation of House property which is held as stock-in-trade pursuant to certain conditions. Even if such house property is not let out after two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, the said property would be subjected to notional basis of taxation. It is pertinent to note that no such notional tax is levied for a period of 2 years.
The rationale behind the said provision was to eliminate hoarding of real estate properties for speculative purposes. However, in the current pandemic situation, the real estate builders and developers are already facing genuine hardship in disposing off the properties resulting in accumulation of unsold inventory.
In view of the above, the said provision either needs to be repealed or the period should be increased from 2 years to 3 years with retrospective effect from FY 2020-21 itself.
