Budget 2019; Lower basic rate of income tax in case of companies – should also be applied to other assesses having turnover up to ₹ 400 crore. Marginal rate can be reduced to 25% in all cases to avoid unjust higher rates.

[CA DEV KUMAR KOTHARI]

In this write-up Basic rate of income tax means rate of income tax exclusive of applicable cess and surcharge. 

Marginal rate of basic income tax:

Readers are well aware about basic rate of income tax, basic exemptions and progressive rate of tax in case of some type of assesses. Therefore on this aspect detailed discussion is not made and readers can refer to tax tables in any standard book and / or ready reckoner/ tax tables etc.

In the case of individuals, HUF, AOP, BOI, firms and domestic companies marginal basic tax rate is 30%.

In case of partnership firms, and domestic companies the basic tax rate is flat 30% without any slab and basic exemption. Exception by way of lower rate is as discussed. 

Concessional rate of tax in case of companies having turnover up to ₹ 400 crore:

From the Memorandum to Finance (no. 2) Bill 2019:

E. ………………… In case of domestic company, the rate of income-tax shall be twenty five per cent. of the total income, if its total turnover or gross receipts in the previous year 2017-18 does not exceed four hundred crore rupees, and in all other cases the rate of Income-tax shall be thirty per cent.

From the budget speech of honourable Finance Minister:

Direct Tax

110. So far as corporate tax is concerned, we continue with phased reduction in rates. Currently, the lower rate of 25 % is only applicable to companies having annual turnover up to ₹ 250 Crore. I propose to widen this to include all companies having annual turnover up to ₹ 400 crore. This will cover 99.3% of the companies. Now only 0.7% of companies will remain outside this rate.

Observation of author:

We find that in case of companies having turnover below specified limit rate of tax is 25% instead of 30%.

The concession is based on amount of turnover in previous year 2017-18 and not the previous year relevant to assessment year.

Concession is not based on investment in capital assets or business or profitability.

Turnover being basis- concession should be allowed to other assesses also:

When turnover is the basis, then there is no logic, reason or justification  for not extending similar concession to any other type of assesse having turnover from business  and /or  profession like  individuals, HUF, Firms, AOP, BOI, Co-operative societies etc.

For example say a partnership firm having turnover of ₹ 100 crore and having net taxable income of ₹ 10 crore will have to pay ₹ 3.0 crore as basic income tax. Whereas if the same position prevails in case of a company, tax payable will be 2.5 crore.

As per budget speech 99.3 % of companies  shall be eligible for the concessional rate and only 0.7% of companies well  be paying tax @ 30%.

In the category of such 0.7% company’s major part will be Public Sector Companies including public sector banks, FI, oil and gas companies etc. and some mega companies from private sector will also pay full tax.

All such companies should be identified and amount of loss which would be caused if 25% rate is extended to all such companies should be ascertained.

In case all companies are extended concessional rate of 25%, it will give major boost to market value of shares of such companies and that can compensate the government by improved market valuation and capitalization of PSU’s. Government will be able to garner better price of shares  of public sector companies in its disinvestment plan.

Normal course for taxpayers to gain out of concessional rate:

It is normal that when such tax concessions are available to one class and not to others, there will be attempt to earn and hold more earnings in entities having lower rate of tax. Towards this object the following type of planning is inevitable:

1. In case of private companies income shall be retained  more in companies and not distributed by way of remuneration to directors and dividend to shareholders who have to pay higher tax on surpluses also.
2. Opening new company when turnover is likely to exceed prescribed limit and to divide turnover in more than one company. 
3. Carrying business in form of company whenever it is possible and convenient. For  example, many professionals have incorporated companies for carrying service activities in companies where it is permitted.

Request to honourable FM:

We find that the NAMO Government has failed to meet its commitments to increase basis exemptions to Rs. five lakh in a justified manner even for individuals. Without basic exemption, it is difficult to create good capital base which is required for any individual. With good capital base, any amount of tax is burdensome. Therefore, one of method to make strong India which is avowed object , can be achieved by ensuring  creation of capital base in hands of individuals – citizens on our country. Towards this purpose basic exemption should be increased so that one can save some capital out of earnings after meeting reasonable personal expenses. Therefore, basis exemption should be raised to Rs. five lakh not by way of incentive for investments and tax rebate but as a right of individual. Towards this purpose, it is also necessary to omit income clubbing provisions so that capital can be built for children, and wife also. Stronger capital base in hands of all individual will go a long way in improving capital base of the country as well.

In view of above discussions, author request honourable FM to reduce marginal rate of basic income tax to 25% in all cases to avoid unjustified higher rate of basic income tax.