It’s a transformational change, but reforms are a continuous process (Live Mint)

Mains Paper 3 : Economy
Prelims level : Not much
Mains level : Highlights of the amending tax rate for corporate

Context

•  The despondency in the economic scenario visible over the last few months needed the government to take steps which were not incremental in nature, but were transformational.
•  The finance minister deserves kudos for having come up with a set of changes to the rates of income tax that are radical, and which should boost the economy.
•  More importantly, these make us competitive in the global market and are, to an extent, like the radical tax reforms in the US in the past.
•  For starters, it was the demand of the industry that this government having provided sunset to the incentives, honours its commitment to lower the rate of tax from 30% to 25%.

Amending the tax rate for corporates

•  The ordinance passed on Friday goes a step further and caps the rate of tax of corporates who do not avail of any incentives to 25.17%, inclusive of surcharge.
•  Such companies would have no minimum alternate tax liability. For existing companies that are availing and would like to continue to avail tax incentives, the rate of tax will continue to be 30% or around 25% (depending on the turnover).
•  However, their minimum alternate tax liability would go down from 18.50% to 15%. Where a company opts for the lower tax regime by giving up incentives, the past losses relatable to such incentives would lapse.
•  Finally, new companies set up to undertake manufacturing activities would be subjected to a tax rate of 15% plus surcharge, i.e., an effective rate of tax of 17.16%.

Tax structures in emerging economies

•  As we look at the rates of tax in the Association of Southeast Asian Nations (Asean) or in other emerging economies, this is possibly one of the most competitive tax rates.
•  As India looks to incentivize US multinational companies to shift their manufacturing base from China to India, the proposed rate of tax would be a true attraction.
•  One very interesting question arising out of these changes is that if an existing company moves from its current regime of availing exemptions and opts to be covered by the new regime of 25.1% tax rate, what happens to its accumulated minimum alternate tax credit?
•  The availability of such credit appears unlikely.
•  There are companies who have a significant minimum alternate tax credit sitting in their accounts, and they may face a potential write-off if these credits cannot be absorbed in the future.
•  As such, deciding on whether or not to opt for the new tax regime would be an involved question.

Way forward

•  The provisions relating to the non-levy of increased surcharge on income arising by way of capital gains where the securities transaction tax is paid formalizes the announcements already made earlier.
•  One would have wished that the increased surcharge was done away with altogether.

Conclusion

•  The provisions relating to availing buyback tax of listed companies only to announcements made from 6 July 2019 is indeed sensible.
•  The earlier provisions had made the levy retrospective.
•  A few issues need further consideration.
•  Why leave limited liability partnership, or LLPs, out of the new tax regime?
•  Do we not need to look at the rate of dividend distribution tax? The process of reforms is a continuing one and the next set of announcements will hopefully deal with these issues.

Prelims Questions:

Q.1) Consider the following statements with reference to Regional Anti-Terrorist Structure (RATS):
1. Regional Anti-Terrorist Structure (RATS) is permanent organ of Shanghai Cooperation Organization (SCO).
2. It has the sole objective to promote cooperation of member states against the threat created by terrorism only.
3. Recently, India hosted its first ever Shanghai Cooperation OrganizationRegional Anti-Terrorist Structure (SCORATS) meeting in Delhi.
Which of the above statements is/are INCORRECT?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) all of the above

Answer: B
Mains Questions:
Q.1) How equitable is it to tax hard earned income at a higher surcharge and capital gains at a lower surcharge merely to promote investments on the stock exchange and to promote foreign portfolio investment fund flows?