In the Direct Tax Proposal, perhaps first time in India, Finance Minister has proposed the corporate tax rate at 25% while the Maximum Marginal Rate (Peak Rate) in case of Individuals is proposed to set at 30%. Whereas the tax rates for unincorporated non-individual entities have been proposed to remain same as at present level i.e. at 30%.

Whether it would result into corporatization of the proprietorship concerns or partnership concerns? It is to be seen when the direct tax code would become the reality since it is too early to comment on this issue.

Corporate world is looking this code with surprise since they will have to pay MAT (minimum alternate tax) at 2% on Gross Assets instead of book profit. Since this new concept of MAT would have major impact on the profitability and balance sheet of the company.

There would not be any surprise where the quantum of MAT at 2% would always be more than 25% for a well performing company having good infrastructure and gross assets [specifically during the initial years of commencement].

On the other side, Dividend Distribution Tax also creates a hindrance for conversion of non-corporate entities into corporate entities.

 

Tax rate differential increases individual burden, with MAT on gross assets and dividend tax hindering conversions. Direct tax proposals create a tax rate differential by proposing a lower corporate tax rate than the maximum marginal rate for individuals while keeping unincorporated entity rates unchanged; they shift MAT to operate on gross assets instead of book profit and retain Dividend Distribution Tax, together potentially discouraging conversion of non corporate entities into corporate form and increasing tax burden for asset intensive or early stage companies.