Now that industry’s wish for a goods and services tax has been fulfilled, a lower corporate income-tax rate will be next on its wish list. Companies point to the painfully high average statutory tax rate of 34.47% to seek a lower rate. But the government points to the effective tax rate (ETR), which last year’s budget documents say was much lower at 28.2% in fiscal year 2015-16.

The industry may then counter this by saying that ETR was up sharply from 24.7% in the previous year (chiefly due to phasing out exemptions and the levy of minimum alternate tax).

The government’s contention is that if it has to lower the corporate income-tax rate, it will eliminate tax exemptions. In 2015-16, the estimated tax revenue lost to exemptions was Rs76,858 crore and this was projected to increase to Rs83,492 crore in 2016-17.

A lower tax rate without exemptions will lead to a more equal tax treatment across sectors. Firstly, the services sector suffers an ETR of 30.3% compared to 25.9% for manufacturing. A lower rate will see the services sector, a key driver of economic growth, benefit. Secondly, larger firms pay a much lower ETR compared to smaller companies.

In last year’s budget, the government has already brought down the tax rate on smaller companies with revenue of up to Rs50 crore to 25%. But as Chart 1 shows, companies with profits before tax of less than Rs500 crore have a higher ETR.

If the average tax rate is lowered, say to 25% from the current 34.47%, sectors such as banks and financial institutions, food processing and electronics will benefit, but there are sectors which had a lower ETR than this rate. They could see their tax liability increase (see chart 2).

If the tax rate is lowered and exemptions removed, there will certainly be gainers but the irony is that there could be losers as well.

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