Corporation tax is effectively a direct tax levied on a company’s net income or profit derived from its operations. Both public and private companies registered in India under the Companies Act 1956 are obligated to pay this type of tax. It is distinctly different from income tax, as the latter is taxed on an individual’s income like wages and salaries, whereas corporate tax is imposed on the net income of the company.
The Change: Concessional Tax Rate Regime
In September 2019, the Union government introduced a change in the conventional tax regime by announcing a substantial reduction in tax rates for newly incorporated domestic companies.
The concessional tax rate regime, a measure of tax relief, implies a decrease made by the government in the amount of tax that specific groups or types of organizations have to pay. Prior to this scheme, the corporate tax rate was 22% without exemptions.
Under the new regime, according to Section 115BAB, a tax rate of 15% was declared for new domestic companies which make fresh investments by 31st March, 2023. These investments should be targeted towards manufacturing, production, research or distribution of articles or goods manufactured. This deadline was later extended by a year in the Budget (2022-23) to 31st March, 2024.
A Concessional Rate Regime for Personal Income Tax
The Centre also introduced a similar concessional rate regime for personal income taxpayers from 2020-21 (Income Tax Act). As per this, taxpayers willing to forego deductions and exemptions such as those under sections 80C, 80D, house rental allowance and leave travel allowance could opt to pay tax on their income at a reduced rate.
Despite the fact that the government has not yet published data on how many taxpayers have chosen the new personal income tax regime, indications are that it has not managed to pull in taxpayers in large numbers. This has prompted the government to reassess this model.
Impact of the Concessional Tax Rate Regime
The introduction of the concessional tax rate regime has led to a considerable 7% increase in additional investments by the firms that benefit from this policy. Despite this, the Reserve Bank of India had previously noted that the new tax regime did not stimulate the investment cycle as intended. It has been suggested that the tax rate cut may have been used more for debt servicing and building up cash balances and other current assets, rather than restarting the Business cycle.
