L Badri Narayanan, S Vasudevan and R Subhashree analyse updates to tax laws and other measures proposed for companies in the 2018 Budget
Finance Minister Arun Jaitley quoted Swami Vivekananda’s vision of a New India emerging “from the peasant’s cottage … from markets and from hills and mountains” before commending the budget to the house. The focus on agriculture, health, education and small industries was clearly visible. The Finance Bill, 2018, did not largely deviate from the tone of the previous year that ushered in thin capitalization rules, secondary adjustment and discouraging payment of expenses in cash. Thus, while incentivizing startups, reducing the corporate tax rates for smaller companies, proposing e-assessment and team-based assessment to reduce interface between the taxpayer and the assessing officer, this year, the finance minister also proposed a number of measures to improve tax compliance.
Reduction in corporate tax
In the 2015 budget speech, the finance minister had promised to bring down corporate tax rates to ASEAN levels of 25% gradually while also phasing out many incentives and allowances. The corporate tax rate is now proposed to be reduced from 30% to 25% (exclusive of surcharge and cess) and will be applicable to companies having turnover up to ₹2.5 billion (US$38.5 million) in financial year 2016-17. However, no similar reduction in tax rate has been proposed in respect of foreign companies.
Incentives for startups
Presently startups incorporated on or after 1 April 2016, but before 1 April 2019, can enjoy a 100% deduction of profits and gains for three consecutive years out of seven years if their total turnover does not exceed ₹250 million and are engaged in eligible business involving innovation, commercialization of new products, etc., driven by technology or intellectual property. As per proposed amendments, the benefits will also be extended to startups incorporated between 1 April 2019 and 1 April 2021. The amended definition of eligible business would include a scalable business model with high potential for employment or wealth generation.