Budget 2017: Tax rate cut for MSMEs a smart move

The government's decision not to reduce the corporate tax rate uniformly for all companies may have come as a disappointment for large industries, but given the limited headroom it has made a smart choice of only reducing the tax rate for medium, small and micro enterprises (MSMEs).

The government in its budget decided to cut the tax rate for MSMEs with turnover of up to Rs 50 crore from the 30 per cent to 25 per cent. This make sense because it can have a larger impact without denting its coffer much. The reason being this sector account for only 20 per cent of the total tax collection through corporate tax though they account for 96 per cent of the total registered companies. The annual revenue lost estimated due to this measure is Rs 7,200 crore.

The budget document shows that in 2014-15, companies with turnover of Rs 50 crore and more accounted for 76 per cent of the total tax collected by the government. Out of this, companies with turnover of more than Rs 500 crore accounted for 56 per cent of the total corporate tax collected, 15 per cent by companies with turnover of Rs 100-500 crore and 5 per cent by companies with turnover of Rs 50-100 crore.

Spelling out the rationale behind the move to reduce the tax rate on MSMEs, the finance minister Arun Jaitley said in his budget speech: "Medium and Small Enterprises occupy bulk of economic activities and are also instrumental in providing maximum employment to people.  However, since they do not get many exemptions, they end up paying more taxes as compared to large companies. As per data of financial year 2015-16, 2.85 lakh companies making profit of less than Rs 1 crore pay effective tax rate of 30.26 per cent while 298 companies making profit above Rs 500 crores pay effective tax rate of 25.90 per cent."

According to the budget speech, there are 6.94 lakh companies filing returns of which 6.67 lakh companies fall in this category (which annual turnover of up to Rs 50 crore) and, therefore, percentage-wise 96 per cent of companies will get this benefit of lower taxation.

The industry at large was expecting a corporate tax reduction of at least 2 percentage point given the government's roadmap of reducing the corporate tax rate to 25 per cent from the existing 30 per cent.

Rahul Garg, leader, direct tax, PwC India, says that the government has not much headroom for across the board cut in corporate tax rate and therefore, it went with the sector that can have maximum impact given the MSME sector was paying a much higher tax than large companies which anyway pay an effective tax rate of 24 per cent.