The long-awaited changes in India’s over half-a-century-old income tax rules may finally be upon us—perhaps by the next fiscal year. A panel set up by the government to review the direct tax code (DTC) has submitted its report. If implemented, its recommendations would supplant the existing Income Tax Act of 1961. None of them has officially been made public yet, but media reports point to a relief in tax rates for individual taxpayers, simpler assessment procedures and a lower corporate tax rate even for large companies, among other changes, such as fewer exemptions and the use of Artificial Intelligence to curb tax evasion. A proposed replacement of “assessing officers" with “assessment units", as reported, has attracted special attention. So has a new mediation process to settle tax disputes. Together, these could reduce the harassment of taxpayers. But from the perspective of India’s economy, what might turn out to be the most effective is the rationalization of corporate taxation.
The DTC panel proposes that a 25% corporate tax rate—which currently applies only to companies with turnovers of up to ₹400 crore—be applicable to all firms without exception. This was a promise that former finance minister Arun Jaitley made a few years ago, but was left unfulfilled on account of revenue shortfall worries. While 99.3% of all corporate assessees may already be in the 25% bracket, as finance minister Nirmala Sitharaman pointed out in her budget speech, the division between small and large companies is hard to justify. The size cutoff is not just arbitrary, it deters firms just under the limit from growing bigger. Also, large companies in the 30% tax bracket account for the bulk of revenues raised this way, so the actual burden on corporate India, taken as a whole, remains heavy. These happen to be the country’s biggest job providers. They are also the firms that need to be globally competitive if the private sector in general is expected to contribute in a big way to the economy’s success.
Even at 25%, India Inc. would be parting with more of the money it makes than companies in other parts of the world. The global average corporate tax rate is around 23%. Big Indian corporations, in contrast, pay a base rate of 30%, with add-on cesses and surcharges taking the effective rate to 35% or so. In a world where firms must compete with others, not just on product quality and prices, but also on raising capital, a high rate serves as a handicap. If over one-third of profits are claimed by the state, then it is that much harder to achieve returns on investments that look impressive by world standards. Policy-imposed constraints on corporate profitability also result in lower investable surpluses, leading to slower growth. All of this eventually hurts their ability to take on global competition and turn into world beaters. A lighter tax burden on India Inc. may deprive the country’s exchequer of some funds, but could have a positive impact that would more than compensate for this loss in the long term. India’s woefully low dividend yields would also rise, generating enthusiasm for equity ownership among those who prefer slivers of business profits over capital gains on stock trading. In time, it could spawn a whole new equity culture. It’s time for New Delhi to shed its inhibitions and give our corporate sector the helping hand it needs.