The Indian budget has offered a further push to India's informal manufacturing sector by proposing a 5 percentage point cut in corporate tax to 25 per cent for businesses with a turnover of up to £5 million. The tax cut is expected to impact 96 per cent of the country's MSME sector, cumulatively accounting for almost half of India's GDP and over 80 per cent of the overall employment, and could help increase tax compliance in the informal sector.
Announcing the move, Arun Jaitley cited tax data to suggest that during financial year 2015-16, 285,000 companies that recorded profits of less than £100,000, paid tax at an effective rate of 30.26 per cent even as 298 companies that recorded profits of above £50 million paid effective tax rate of 25.90 per cent. "In order to make MSME companies more viable and also to encourage firms to migrate to company format, I propose to reduce the income tax for smaller companies with annual turnover up to £5 million to 25 per cent," the Finance Minister said.
As per data for assessment year 2015-16, there were 694,000 companies filing returns of which 667,000 companies would fall in this category, translating into 96 percentage of companies getting the benefit of lower taxation. "This will make our MSME sector more competitive as compared to large companies. The 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," he said.
