The recent announcement by the Finance Minister Nirmala Sitharaman on the corporate tax cut, dilemma has gripped several loss-making companies in capital-intensive sectors such as steel, infrastructure and engineering — whether to opt for lower corporate tax rates and increase profitability, or pay higher taxes under current rates and carry forward the losses, as published by Economic Times.
Many such companies that have made large capital expenditure in the past few years are reaching out to their tax advisers for a solution. Depreciation claimed on new plants and machinery has allowed them to report net losses, which they can carry forward over an eight-year period under the current regulations and use to offset future profits. Many do this in a staggered manner, to reduce net profit and pay lower tax.
This benefit of carrying forward losses may not be available under the new tax slabs announced by finance minister Nirmala Sitharaman last Friday, tax experts said. The government slashed the corporate tax rate to 22% from 30% for existing companies, and to 15% from 25% for new manufacturing companies.
Including a surcharge and cess, the effective tax rate for existing companies would now come down to 25.17% from 35%. Companies can opt for the higher tax rates or the new ones.
“The effective tax rate for several companies that are loss-making and are able to carry forward losses due to depreciation could be less than 25% and so they will have to evaluate whether they want to move to the new tax regime,” said Sudhir Kapadia, the national tax leader at EY India.
A subject matter expert says, corporate tax cut is just an eye wash reason being, lower tax rates by the FM & increase profit, resulted on will have to pay higher taxes .
Secondly, welcoming the move by the FM is to boost fresh investment in manufacturing. For new companies incorporated on or after October 1, 2019, making fresh investment in manufacturing, the tax rate has been cut to 15 per cent from 25 per cent currently. Inclusive of surcharge and cess, the tax rate comes to 17 per cent. These companies will also not have to pay Minimum Alternate Tax (MAT).
India Inc. has been pushing for a reduction in the MAT rate. The FM has reduced the MAT to 15 per cent from the existing 18.5 per cent for those companies which continue to avail of exemptions.
IT companies that currently pay less than 25 per cent effective tax rate will benefit from the MAT reduction, if they continue to avail of exemptions.