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The transition to new tax regime may be staggered

Sanjiv Shankaran

Finance minister Nirmala Sithraman’s announcement this morning of a reduction in the Effective Tax Rate for existing companies to 25.17%, if they choose to transition to the new regime, may not lead to much of a revenue loss this year.

According to Sithraman, the possible revenue foregone on account of the tax changes is Rs 1.45 trillion.

The calculations would have to depend on some assumptions on the number companies who transition. It’s worth pondering if the finance ministry has overestimated the potential outgo.

The reason for it is that the effective Tax Rate of 25.17% is not much lower than the prevailing effective tax rate borne by a handful of firms which contribute a little more than half the share in government’s total tax liability.

According to the Receipts Budget tabled in parliament in July by the finance minister, a mere 373 firms of the 8,41,687 firms in the tax department’s database contributed 52.08% of the corporate tax in 2017-18.

The effective tax rate of the 373 firms was 26.30%, a little more than a percentage point higher than what the government announced today.

This effective tax rate of these firms is far lower than the average statutory rate of 34.40%.

The reason these companies have such a low effective tax rate is that they have made good use of exemptions such as accelerated depreciation.

Any shift to the new tax regime will have to be at the expense of a complete surrender of exemptions. Many of these firms may not want a sudden transition as a lot of tax planning would have already taken place.

Therefore, even as corporate representatives welcome the new announcement, the transition to the new regime may be staggered. The fiscal impact, therefore, may not be as heavy as it appeared soon after the announcement.

DISCLAIMER : Views expressed above are the author’s own.

via TOI Blog

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The transition to new tax regime may be staggered


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