With the economy showing signs of slowing down under the impact of global recession, global tax consultancy firm Ernst and Young has said the new government will need to reduce corporate and personal income tax rates to give a major boost to the ailing economy and keep it moving at a decent pace.

In the fiscal stimulus packages announced in phases from December 2008 to March 2009 in India, the government seems to have concentrated on indirect tax cuts, accompanied by increased government spending and some measure of accelerated depreciation provision policies, according to Satya Poddar, partner (Tax Policy Services), Ernst & Young, India. This is part of the global survey carried out by Ernst and Young in 23 countries which led to the release of the report titled Worldwide fiscal stimulus tax policy plays a major role.

According to Ernst and Young, the new Indian government will do well to introduce measures such as providing for carry back of losses, possible reduction in corporate and personal tax rates perhaps by doing away with surcharge and accelerated bonus depreciation for new plant and machinery. Such measures will accelerate investments and boost productivity and employment, it said. It said while in the past there were tax policy measures such as streamlining of tax rates, increase tax depreciation, tax holidays for backward areas or sunrise sectors, it was time progressive measures were also introduced. One such measure could be providing for carry back of losses, Mr. Poddar said.

At present, in India, unutilised business losses can be carried forward for eight years to be set-off against future business income. There is no provision for carry back of such business losses to be set-off against the profits of earlier years. To provide cash flow assistance to companies in a tax loss position, many countries have instituted or enhanced, provisions relating to the treatment of business losses. Permitting Indian companies to carry back business losses will help them optimise their cash flows, he explains. The report said the government, as part of the stimulus packages to boost the economy, had reduced indirect taxes but did not announce any changes in the direct tax rates.