Budget 2017: Reduced tax rate for MSMEs to benefit 96% of India’s companies

MUMBAI: The government steered clear of a bold reform step of cutting the corporate tax rate and removing a range of exemptions. Instead, it proposed to reduce the income-tax rate for micro, small and medium enterprises to 25% from 30% previously. It also allowed credit for minimum alternate tax to be carried forward for up to 15 years instead of 10 years.

With the reduced rate for the MSME sector, 96% of India’s companies will benefit from lower taxation. “25% rate for 96% of the companies. Excellent. Top 4% pay lower effective tax anyway. Loss carryover of 15 years under MAT is correct. However, no mention made on the GAAR preparation despite the tax administration challenge being immense,” said public finance expert Parthasarathi Shome.

India’s corporate tax rate, at 34.6% with cess and surcharge, is steep compared with the global average. The CII’s suggestion to lower the tax rate to a flat 18% without exemptions would have put all businesses on the same level.

“Without factoring in exemptions, the reduction in the tax rate of MSMEs provides them a level playing field with foreign companies,” said Kaushik Mukerjee, a partner at PwC.

The outgo for an MSME will now be about 43.32% including the dividend distribution tax, compared with 43.26% for a foreign company, which doesn’t pay DDT, he said. Limited liability partnerships, which are taxed at the lowest rate of 34.6%, could be the route for MSMEs to take, said Mukerjee.

Bigger companies have been provided some relief, with the Budget extending the time period to carry over MAT credit. However, India would need to speed up direct tax reforms to attract investors. Most count r i e s h av e chipped away at corporate tax rates to woo investments and the new US administration has vowed to cut corporate tax rate to 15%.