With the finance minister’s promise to provide a budget like never before, the 2021 Union budget due on February 1, 2021 is one of the most anticipated budgets in years. Suresh Surana, the founder of RSM India, shares his views on what the Indian 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 main focus of the Union’s 2021 budget will be on revitalizing growth and jobs and gradually setting the roadmap for the gradual restoration of fiscal discipline. Taxation is a key area of the budget – here are four expectations of corporate taxation:
Extension of the scope according to Section 115BAB for domestic companies with new production
Section 115BAB offers the opportunity to pay a new domestic manufacturing company founded on or after October 1, 2019 at a preferential rate of 15% under certain conditions. This benefit is available to non-exempt / non-incentive companies that begin production on or before March 31, 2023.
A company choosing this option would thus be subject to an effective tax rate of 17.16% including surcharge and levy and would not be required to pay MAT. This together with the GST implementation has made India a compelling manufacturing base as several global companies seek a broad base of their global manufacturing base in India.
A condition must be relaxed for this provision to take full effect. The need to create a “new manufacturing company” after October 1, 2019 results in the lower rate being rejected for companies that already have companies in India but want to set up a new production unit under the same company. It would be advisable to extend this benefit to the profits from “new production units” established on or after October 1, 2019, whether or not a separate company was formed.
There are several provisions of the Income Tax Act where a lower rate applies to certain types of income and this basis can also be used for the profits of new units of production.
Taxation of dividends @ 20% for Resident Shareholders
The optional corporate tax system has lowered the corporate tax rate to 22% plus surcharge and levy, resulting in an effective tax rate of 25.17% in most cases. However, dividends distributed by Indian companies are again subject to shareholder taxation. The tax rate for non-residents for such dividends is 20% plus surcharge and levy in accordance with the provisions of the IT Act (which can be further reduced under the double taxation agreement).
However, for Residents / HUFs and Affiliates / LLPs, these dividends are taxed at the blanket / applicable rate and can be up to 35.88%. This results in an effective tax of 52% on profits made by companies and distributed to shareholders. For resident shareholders that apply to non-resident shareholders, this rate must be reduced to 20% (or lower for taxpayers subject to the lower income brackets).
Deduction related to staff costs – Section 80JJAA
With the intention of encouraging job creation for all sectors, the 2016 Finance Act introduced Section 80JJAA to allow all assessments audited under Section 44AB to deduct 30% of the additional staff costs for three assessment years. However, such a deduction has only been restricted for employees receiving salaries or wages up to Rs. 25,000 per month, which has limited the usefulness of the provision as several employment-intensive companies receive remuneration that exceeds the threshold above.
Last year, jobs were severely cut due to the nationwide lockdown. Hence, there is an urgent need to encourage job creation as it is a key to economic growth and development.
In view of the above, it is expected that the compensation ceiling will be increased to Rs. 50,000 per month from Rs. 25,000 per month. In addition, it would be more appropriate to add 10% to the total cost of employees rather than 30% of the additional staff costs, since keeping jobs is as important as creating new ones.
Elimination of the fictitious taxation of shares under residential property for building owners and building contractors – Section 23 (5)
Section 23 (5) ITG provides for the taxation of property that is held as a commercial property under certain conditions. Even if such a house is not rented after two years from the end of the fiscal year in which the certificate of completion of construction of the property is obtained from the competent authority, the property would be subject to a notional tax base. It should be noted that no such notional tax is levied for a period of 2 years.
The rationale for this provision was to eliminate real estate hoarding for speculative purposes. However, in the current pandemic situation, real estate builders and developers are already facing real difficulties in selling the properties, resulting in an accumulation of unsold inventory.
In view of the above, this provision must either be repealed or the period should be retrospectively extended from 2 to 3 years from the 2020-21 financial year.