The finance ministry is examining the possibility of cutting the corporation tax rate by one to two percentage points, even as the revenue department is set to kickstart Budget consultations with industry and consultants from the first week of November. The ministry’s thinking is part of bringing down the corporation tax rate to 25 per cent by the end of 2018-19, from 30 per cent at present.
An official said the government could look at an across-the-board one to two percentage point reduction in corporation tax rate, from 30 per cent next year, based on the phasing-out of exemptions.
Finance Minister Arun Jaitley had, in 2015-16, promised a reduction in corporation tax rate to 25 per cent by 2019. Towards that, it has laid down the road map to simultaneously phase out exemptions given to the corporate sector to reduce the tax rate, simplify administration, and improve India’s competitive edge globally. Corporation tax is 30 per cent, but it is effectively 23 per cent due to many exemptions and deductions.
In the 2016-17 Budget, the corporation tax rate for companies with a turnover of ~5 crore or less was lowered to 29 per cent plus surcharge and cess from 30 per cent plus surcharge and cess. Besides, a lower corporate tax rate of 25 per cent was also announced for all new manufacturing companies incorporated from March 1, 2016 onwards, given that they do not claim any exemptions.
Another senior government source who is part of the pre-Budget consultations also said that deliberations are ongoing in the finance ministry regarding reducing corporate tax by one to two per cent in the 2017-18 Budget. “Things will be finalised closer to the Budget, but we are discussing on how to bring corporation tax down to 25 per cent by 2019. There will be a cut in the upcoming Budget and in the one after that,” the official said.
The revenue foregone in 2015-16 on account of exemptions stood at over Rs 62,000 crore.
Neeru Ahuja of Deloitte pointed out that the finance minister must reduce the corporate tax rate as promised two years ago. “We expect him to cut rates this time for both corporate tax and some rates for individuals as well.”
The revenue department’s discussions will be crucial amid a slew of taxation reforms expected to come up from the next financial year – goods and services tax, general anti-avoidance agreement (GAAR), revised double-taxation avoidance agreements (DTAA), base erosion and profit shifting (BEPS) measures, among others.
“Budget consultations are beginning from the first week of November. The talks will revolve around making taxation regime easier for industry and individuals. A range of taxation changes are coming up from the next financial year. So, these discussions will be crucial,” said a senior government official.
The government is rolling out GAAR from April 1, 2017, to plug loopholes in tax treaties. Basically, GAAR is a set of rules designed to give Indian authorities the right to scrutinise tax transactions, which they believe are structured solely to avoid taxes.
According to Ahuja, a range of clarifications and follow-ups are expected on issues such as GAAR and country-by-country reporting under BEPS.
India also amended the DTAA with Mauritius in April, allowing the former to impose capital gains tax on shares from next year at 50 per cent rate and fully from 2019. It is also negotiating the DTAA with Cyprus and Singapore.
The government is also awaiting the second report from retired judge R V Easwar-headed panel on direct taxes.