As the finance minister appeals to India’s business leaders to invest in the infrastructure sector, company honchos are keen that the corporate tax rate be lowered. Sensing the mood, the government is unlikely to further delay this issue and an announcement may be made during the Union budget to lower the corporate tax to 25 per cent.
Finance minister Arun Jaitley during the 2015-16 budget speech had announced cutting basic rate of corporate tax to 25 per cent from the current 30 per cent over the next four years vis-à-vis reduction in various exemptions.
A high rate with too many exemptions had led to a situation in which the government neither gets revenue nor investment, he had said. In the 2017-18 Union budget, the corporate tax rate was reduced to 25 per cent from 30 per cent for companies with a turnover of less than Rs 50 crore annually.
Jaitley is now likely to raise the threshold further, potentially extending the benefit to a large number of companies, which were adversely affected after demonetisation and GST roll out, sources said.
However, very large companies may still be kept out from lower corporate rate exemption, pending the report of the Task Force set up to redraft the Income Tax Act. Revenue implications will also be on the finance minister’s mind before taking a call on providing corporate tax relief to all categories of corporates under the earlier roadmap defined by him.
Collections under GST have been uncertain while income tax collections have been below the budget estimates.
The government has already reduced tax rate for SMEs, which covers close to 98 per cent of the corporate population.Any further step has to be well calibrated, given that the balance 2 per cent of the companies contribute more than 85 per cent of the tax revenue, said Sanjay Kumar, a senior director with Deloitte India.
"If the overall response on revenue through the measures is not positive and in line with the fiscal need of the country, the development will be affected. Corporates contribute about 49 per cent of direct taxes," Kumar said.
During his pre-budget customary meeting with industry leaders in New Delhi on Wednesday, the finance minister asked them to make investments in the infrastructure sector to build a stronger India.
Private investment along with public and foreign investment is the key to boost growth and create job opportunities, he said.
On the other hand, industry chamber FICCI president Pankaj Patel said: “The finance minister had promised 25 per cent corporate tax rate long ago and we expect that he will fulfill his promise in this budget.”
The other chamber, CII suggested that the road map for corporate tax rate for India should include reducing it to 18 per cent at the earliest and withdrawal of surcharges and cesses.
“We have asked to reduce corporate taxes. Across the world, people are reducing corporate taxes and India is among the highest. We do need to create more demand and capacities for private investment and if you see today, GST has increased the tax rates,” CII president Shobana Kamineni said.
The basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in the other major Asian economies, making the domestic industry uncompetitive, Jaitley had said.
The effective collection of corporate tax is about 23 per cent, as per a study.
As per Jaitley, a regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. So, when corporate tax is reduced, it will lead to higher investment, growth and more jobs.