Services companies' hope for inclusion in new corporate tax regime dashed

As the government lays down red carpet for corporate sector with new reduced tax rate regime, the services companies will have to tread on the old path as their request to be included in the new tax system has been denied by the finance ministry.

Finance minister Nirmala Sitharaman on September 20 had announced to cut corporate tax rates to 22 percent for all existing domestic companies, including surcharge and cess but without payment of Minimum Alternate Tax (MAT), bringing down their tax liability substantially to an effective tax rate of 25.17 percent.

And in order to attract fresh investment in the manufacturing sector, Sitharaman had announced the introduction of a new provision in the Income-Tax Act that would allow any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing, an option to pay income tax at 15 percent.

The effective tax rate for these companies would be 17.01 percent inclusive of surcharge and cess and with an exemption of MAT.​

Noting the benefits of the new regime, services major Infosys had written to the finance minister to consider its request to extend the benefits of reduced rates to service providers as well and not just to "new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing."

However, government sources told CNBC-TV18 that "since the announcement was very clear and specific in nature to extend benefits to new manufacturing units only, the government is clear that it wants to keep these reduced rates for new manufacturing units to encourage Make in India and thus their request could not be taken forward."

The government sources added: "The reason for declining the request was that the government's intended scope of the new tax rates is to encourage manufacturing units, thus, after detailed consideration, the request of Infosys could not be taken forward by the finance ministry."

The Central Board of Direct Taxes (CBDT) on October 2 had come out with a clarification circular denying MAT credits and additional depreciation credits for those shifting to new corporate tax rates and was silent on any clarification needed for service companies.

When contacted by CNBC-TV18, Infosys said: "We will not be able to comment as we are in our silent period."