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India Competitive Tax Regime and Transparent Regulatory Framework - a Signal of Intent

Modi 2.0 has completed one year, and while several notable initiatives have been announced, the one that perhaps captured public imagination like never was the announcement made on 20 September 2019, barely six months into the second term. Through this Finance Ministry announcement, the message was loud and clear – India has opened shop for business on the global market.

The Government brought in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. These changes, which were later codified into law through Parliamentary assent, created ripples of awe across the global business fraternity. A whole host of tax amendments that were unimaginable were announced.

Lower Taxes, Bringing India at Par with Its Global Peers

To promote growth and investment, a new provision was introduced in the Income-tax Act that now allows any domestic company to pay taxes at an effective tax rate of around 25.17% inclusive of surcharge & cess. With this, following complying conditions, companies are also now exempt from paying Minimum Alternate Tax.

In order to attract fresh investment in manufacturing and thereby provide boost to ‘Make-in-India’ initiative of the Government, another new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 15%. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March, 2023. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax. In a single stroke, tax rates were brought at par with Asian rivals like South Korea and China, and was widely hailed by industry, who noted that the step fulfilled the demand of Indian industry and will make it more competitive globally.

Sweeteners were added to the deal on offer. Companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period. Even with the older regime, the rate of Minimum Alternate Tax has been reduced from existing 18.5% to 15%, thus highlighting the willingness to walk the talk on creating a business-friendly tax regime within India.

Financial markets have also been given their due support by the Modi government. To stabilise capital market fund inflow, enhanced surcharge on capital gains was withdrawn, sensing the mood of the market and the industry. This proved to be a major source of relief to the traders who were worried by the potentially significant depletion of earnings arising from sale of company shares, equity-oriented fund units or business trust units. This provision was also extended to gains from sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs), thus giving out a signal of stability and assurance to the investors. Also, in Budget 2020, the Dividend Distribution Tax (DDT) was also removed, thus generating a sentiment of cheer within the market.

Creating Interlinkages Between Institutions, Improving Corporate Governance

The government has also displayed creativity when it comes to the issue of Corporate Social Responsibility (CSR). Companies are mandated to spend a minimum amount, and have often struggled to understand how it can be done. Coming to their rescue, the Government decided to expand the scope of CSR spending mandate. CSR 2% fund maintained by companies can now be spent on Central/State government or even public sector funded incubators, thus helping to create a connecting bridge among start-ups and industry immediately.It is not limited to start-ups only – companies can also make contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies established by research institutions under ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology, thus generating financial support for research in science, technology, engineering and medicine that is aimed towards supporting sustainable development within India.

One may be wont to see this in isolation; however, on pausing to reflect upon the developments over the past six years, this clearly looks part of a bigger picture towards transforming corporate governance in India. Following up in this direction during the year were also amendments introduced in December 2019 to the Insolvency and Bankruptcy Code delivered during the first term. Sensing the ambiguities in the Insolvency and Bankruptcy Code, 2016, the amendments now help ensure smooth implementation of the Code, showing how the government also responds to evolving ground scenarios with ease. With its notification in January 2020, corporate governance accountability has only strengthened in a fair and transparent manner.

Companies Act Reformation – A Feather in the Government’s Cap

After getting elected for a second term, the government put its nose to the grindstone, and wasted no time. By September 2019, the government had constituted a Company Law Committee to identify provisions of Companies act 2013 that needed decriminalization while taking other measures to provide further Ease of Living for corporates in India. Armed with the recommendations based on detailed scrutiny, the government started to undertake steps in that direction. The government pushed through 72 amendments to the Act to reduce penalties, recategorize offences and/or omit them altogether. 23 out of the 66 offences were recategorized, and 7 were dropped from the act.

The Act was further amended to exclude companies having CSR obligation of less than ₹50 lakh to constitute a CSR committee. This was done, based on the recommendations from another committee on the same subject. Furthermore, with this Amendment Bill, Indian companies were enabled to seek listing on stock exchanges in foreign jurisdictions, realizing that this can prove useful in further increasing the competitiveness of Indian companies in terms of access to capital, broader investor base and better valuations.

Steps that seem simple in an extremely tangled political economy like India require a leap of faith and creativity in governance, backed by the trust of people who chose to vote in the Modi government again after seeing the transformation of India between 2014 and 2019. The expectations have not been let down, as demonstrated in this bold move of the government, which chooses to aspire to be the world’s manufacturing and services hub. By creating a favourable tax regime on par with the other manufacturing giants and connecting industry-academia-research for greater synergistic outputs, a shift in thinking has been generated whose benefits will be realized in the near future.

May 27, 2020