Budget 2018: Corporate tax cut for MSMEs to create jobs

Experts say partnership firms and LLPs stand to lose

Partnership firms and limited liability partnerships (LLPs) will be put at a disadvantageous position by Finance Minister Arun Jaitley's Budget announcement to cut corporation tax rate by 5 percentage points to 25 per cent for all micro, small and medium enterprises (MSMEs). 

The Budget for 2018-19 kept big corporates out of this cut, proposed by finance minister three years ago. 

Jaitley extended the benefit of corporation tax cut from 30 per cent to MSMEs with annual turnover of Rs 2,500 million, from Rs 500 million announced in the previous Budget.

These MSMEs constitute 99 per cent of companies in the economy. But the remaining one per cent large companies pay most of the taxes. 

The government said the lower corporation tax for MSMEs would leave them with higher investible surplus, which could be used to create more jobs. “The lower corporate income tax rate for 99 per cent of the companies will leave them with higher investible surplus which in turn will create more jobs,” Jaitley said in the speech. 

Experts said as the benefit has not been extended to partnership firms and LLPs, they stand to lose. “The moot point is that the LLPs and the partnership firms will be at disadvantageous position compared to the corporates,” said Abhishek Rastogi, partner, Khaitan & Company. An LLP or partnership firm with annual turnover of even Rs 50 million would be taxed at 30 per cent, he said, while a company would face 25 per cent tax even if it has annual turnover of Rs 2,500 million. 

tax cut chart

Kapil Nayyar, partner at International Business Advisors, said the government seems to be discouraging small businesses who prefer LLPs over companies. 

The government will forgo Rs 70 billion due to this measure in 2018-19. 

Only about 7,000 of the 700,000 entities filing returns have an annual turnover of more than Rs 2,500 million; and these would have to pay 30 per cent tax. 

The issue is whether the step would make India more attractive for subsidiaries after tax reforms in the US. According to reforms announced by Washington DC, corporation tax would fall to 21 per cent from 35 per cent. This is expected to make the US more attractive for companies to do business these. 

During a pre-Budget interaction, business chambers had lobbied for a cut in corporation tax for all companies. The chambers wanted the reduction to be much below 25 per cent, in the wake of developments in the US. 

Amit Maheshwari, partner, Ashok Maheshwary & Associates, said, “The move is expected to make the Indian rate comparable to the US economy for mid-sized US captives, after the recent federal tax cut.” 

Sanjay Kumar, senior director, Deloitte India, said the steps was a dampener for big corporates in the wake of tax reforms in US.

When Opposition members started shouting after the finance minister announced the cut in corporation tax during the Budget speech, Jaitley was quick to ask, “Are you against tax cuts for MSMEs?” 

Jaitley said the tax was not cut for all companies as all exemptions were not being removed at one go because of sunset clauses. 

Start-up norms

The government on Thursday announced relaxation of norms for start-ups to avail tax incentives to promote budding entrepreneurs in the country, according to PTI reports.

According to the proposed changes announced in the Union Budget 2018-19, income tax benefits would be extended to start-ups that get incorporated up to April 1, 2021. This provision was earlier available only up to April, 2019.

Also, start-ups with a turnover of under Rs 250 million can avail the exemption over a period of seven previous years, commencing from the date of incorporation, it added.

The definition of eligible business has also been expanded to extend the benefit to start-ups that are “engaged in improvement of products or processes or services” or “a scalable business model with a high potential of employment generation or wealth creation”.

Earlier, entrepreneurs involved in innovation, development or commercialisation of “new” products, processes and services driven by technology or intellectual property were the ones who were allowed to claim the benefits.

These changes “will take effect from April 1, 2018 and will accordingly apply in relation to the assessment year 2018-19 and subsequent assessment years”, the Budget 2018-19 document said.

Welcoming the move, Nasscom President R Chandrasekhar said, “The extension of the Start-up India scheme to March 2021 and rationalising the condition of turnover, will enable tens of thousands of start-ups to avail benefits under the Act”.

Besides, evolving a distinct policy for hybrid instruments, which are suitable to attract foreign investments in several niche areas, will advantage start-ups and venture capital firms, he added.

Last year, the government had amended the definition of a start-up, making it easier for the business ventures to avail of incentives and promote entrepreneurship under the Start-up India scheme, which was launched in 2016.

It had said an entity would be considered a start-up up to seven years from the date of its incorporation/ registration, taking into account the long gestation period in establishing new businesses. The period of consideration was five years previously.

While delivering his Budget speech today, Finance Minister Arun Jaitley said the government is committed to taking additional measures to further strengthen venture capital funds and angel investor ecosystem in the country.

Highlighting the role of fintech companies in growth of micro, small and medium enterprises (MSMEs), Jaitley said a group in Finance Ministry is examining the policy and the institutional development measures needed for creating the right environment for fintech companies to grow in India.

Indian Angel Network co-founder and Director Saurabh Srivastava welcomed the recognition of the contribution made by angels and VCs and "the promise of creating more enabling regulations in this area".

Srikanth Sundararajan, Partner at Ventureast, said the next level of details would need to be articulated soon with focus on helping startups attract investments, optimise their cash flow and scale.