Govt may cut corp tax rate to 26% as collections rise
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MUMBAI: The comfort provided by the robust growth in tax collections this fiscal may well prompt the government to weigh the option of pruning corporate tax rates — something that India Inc has been asking for a long time. With direct tax collections growing at well over 40% this fiscal, largely thanks to good corporate earnings and increased compliance, the government is evaluating a proposal to actually reduce corporate tax rates, according to revenue department officials.
One option is to slash the statutory rate which is now 30% to close to 26%, while retaining the surcharge and education cess. India’s corporate tax rate now works out to 33.66%, after factoring in a surcharge of 10% and the education cess of 2% on top of the statutory rate. Reducing the statutory rate would imply a lower tax payout even if the surcharge and cess are retained.
It is clear, however, that a decision on reducing tax rate will hinge on the elimination of a host of exemptions which Indian companies now enjoy and an acceptance by the government that tax compliance has indeed improved. The government and the finance minister, in particular, have been of the view that although the statutory rate is 30%, the effective rate for companies works out to just a tad over 19%, after taking these exemptions into account.
Therefore, any cut in rates would have to go hand-in-hand with the elimination of these exemptions, the revenue department has argued. A cut in rates, if any, could also depend on the realignment of rates in personal income tax rates. Political developments, at the national level, could also have a bearing on the decision. Prospects of an early poll next year — ahead of the full term of the UPA government — may well influence the decision to prune tax rates. For the government, there is a cushion this time in the form of buoyant tax revenues, if it opts for rate cuts. Direct collections grew 43% in April-November this fiscal.
Officials are confident that mobilisations could top the Rs 3,00,000-crore mark, surpassing the budgeted target of Rs 2,67,175 crore set for both corporate tax and personal income tax. But the worry lines relate to expenditure, and if the government is able to keep its spending under check, a cut in tax rate could well be a reality.
The finance ministry has already signalled its intention to phase out exemptions. But, so far, there has been resistance from industry bodies like Nasscom. The argument in favour of phasing out of exemptions in the Income-Tax Act is that it would make the tax law simpler and effective, besides helping reduce litigations that often delay the actual mobilisation of tax dues.
So the moot point is: will India Inc manage to build consensus on the seemingly contentious issue of knocking out exemptions?
Industry leaders whom ET spoke to seemed to echo the need to phase out exemptions. Industrialist and Rajya Sabha MP Rahul Bajaj told ET that there was a case for reducing corporate tax rate to about 26%, after knocking off the surcharge and education cess. He is in favour of doing away with all exemptions, barring two. He reckons that the existing tax break for research and development (R&D), and the exemption granted to senior citizens on their income should be ideally retained. Mr Bajaj said that he would rather plump for the exemptions being eliminated at one go.
However, recognising the ground realities, it would be prudent for the government to apply the axe to such tax breaks over two budgets, he said.
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