Budget 2022 expectations: Corporate taxation

The tax burden on corporates has been substantially reduced and most of the companies pay tax at rates ranging from 17.16 percent to 25.17 percent (including the applicable surcharge and cess) under the new optional corporate tax regime and new manufacturing companies tax regime.

Partnership firms and LLPs, which are particularly the preferred form of enterprise by the small and medium sized businesses, play a critical role in the overall economy in terms of economic activity, exports and employment generation. The tax rate applicable in case of partnership firms and LLPs is a flat rate of 30 percent (plus surcharge and cess), which effectively results in a tax rate of 34.94 percent. In order to bring them at par with the corporates and to incentivise, the small and medium sized business, which are operating either as a partnership firm or an LLP, the income tax rate applicable should be rationalised and brought down either to 25.17 percent or 29 percent (including surcharge and cess).

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Section 115BBD of the IT Act provides for a concessional tax rate of 15 percent on foreign dividends (where equity share capital holding exceeds 26 percent) earned by Indian companies only. Under the Foreign Exchange Outbound Investment regulations, LLPs and partnership firms are also eligible to make outbound investments and, therefore, a similar concessional tax rate of 15 percent should be made applicable to foreign dividends earned by partnership firms/LLPs from their foreign /investments.

Section 94B of the IT Act provides for limitation on interest deduction in case of payment of interest exceeding Rs 1 crore by a domestic company, or a permanent establishment of a foreign company in India with respect to any debt issued/guaranteed (implicitly or explicitly) by a non-resident Associated Enterprise. Such excess interest shall not be deductible while determining the total income.

In the current pandemic situation, where the businesses are already facing a liquidity crunch, they may resort to obtaining funds from their foreign-based group concerns. In this case, the restriction on the interest deduction may further raise difficulties for the taxpayers. Thus, the provisions of thin capitalisation should be relaxed at least for the financial years 2021-22 and 2022-23.

The optional corporate tax regime has lowered the corporate tax rate to 22 percent plus surcharge and cess resulting in an effective tax rate of 25.17 percent 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 percent 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 percent. This results in an effective tax of 52 percent on profits earned by the companies and distributed to the shareholders. There is a need to reduce this rate to 20 percent (or lower in case of taxpayers subject to the lower-income slabs) in case of resident shareholders as applicable to non-residents. This will make the Indian corporate tax regime globally competitive.

-Author Suresh Surana is the founder of RSM India. Views expressed are personal