BackBudget 2015: Corporate tax cut from 30% to 25% for 4 years
Finance minister says high corporate tax with too many exceptions gives the country the worst of both worlds
Premium(Pradeep Gaur/Mint)
Mumbai: The Union budget on Saturday proposed cutting basic rate of corporate tax to 25% from current 30% over the next four years, accompanied by fewer exemptions.
Finance minister Arun Jaitley said a high rate with too many exemptions had led to a situation in which “we neither get revenues nor investments".
The benchmark Sensex closed 141.38 points or 0.48% up at 29,361.50 points on Saturday in volatile trading.
“We need to match this transformative piece of legislation in indirect taxation with transformative measures in direct taxation. The basic rate of corporate tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive," Jaitley said while delivering the budget speech.
Moreover, he said the effective collection of corporate tax is about 23%.
“A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I therefore propose to reduce the rate of corporate tax from 30% to 25% over the next four years. This will lead to higher level of investment, higher growth and more jobs," the finance minister said.
This process of reduction has to be necessarily accompanied by rationalization and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes, he said.
“I wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away; but I thought it would be appropriate to give advance notice that these changes will start from the next financial year. Our stated policy is to avoid sudden surprises and instability in tax policy. Exemptions to individual taxpayers will, however, continue since they facilitate savings which get transferred to investment and economic growth," the minister said.
Harish Salve, one of India’s leading tax lawyers said removal of exemptions to corporate tax is a brilliant measure as lower rate rather than exemptions provides a transparent regime. “My colleagues—accountants and tax lawyers—may have less work if the corporate exemption regime is removed," Salve tweeted.
To be sure, the finance minister said he did not start the process of reduction of corporate tax right away as he wanted to give advance notice that these changes will start from the next financial year.
“While it is not clear how and when the basic corporate tax rates will eventually go down to 25% level from current 30% levels over next four years, the surcharge on tax leviable on income of domestic companies for FY 2015-16 exceeding ₹ 1 crore is increased from 5% to 7% and if income exceeds ₹ 10 crore it is increased from 10% to 12%," said Sunil Kapadia, corporate tax leader at consultancy firm EY.
Representatives of Indian companies are not enthused.
“It is mere positioning in the international market by aligning tax rates to improve its perception by aligning tax rates," said Subba Rao Amarthaluru, group chief financial officer (CFO) at RPG Group and CFO at Ceat Ltd. He said the perception in the international market is that tax rates in Singapore is only 20%, ignoring the fact there is a slew of tax deductions allowed in India. “I don’t think there would be any effective tax reduction as the government will withdraw some exemptions and deductions," said Amarthaluru who is also a member of the management board of RPG Group and a certified chartered accountant.
Another group CFO of an infrastructure conglomerate, while requesting anonymity, said there would not be any effective reduction in the tax rate. “There is no clarity for tax rate reduction. The budget has not laid down the percentage of corporate tax reduction every year," he said.
Some are indeed happy with the corporate tax reduction proposals.
“The reduction in corporate tax from the existing 30% to a proposed 25% and the additional 15% depreciation on plant and machinery, I feel, are welcome measures. Among the most important announcements today was the promise to spend ₹ 1.25 lakh crore on infrastructure. A move that will be seen as bold, the proposed completion of 1 lakh km road will provide impetus to cement and steel industries," said B.K. Goenka, chairman, Welspun Group.
Over ₹ 1 trillion of taxes were locked up in various stages of litigation in service tax and central excise at the end of March 2013, Press Trust of India (PTI) reported in June 2014 quoting the Comptroller and Auditor General of India (CAG). “As no action can be initiated for recovery of revenue till the appeal is pending, locking up of revenue of ₹ 1 lakh crore is a matter of concern," PTI said, quoting the CAG report.
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