Boosted by the massive increase in direct tax collections in the current fiscal year, the government is considering moderation in corporate and income tax rates in the forthcoming Budget.
While it is still early for the final picture to emerge, there is a strong feeling that the government may bring down the incidence of dividend distribution tax from the present effective rate of 14.025 per cent on distributed profits to around 10 per cent.
Although corporate India has in the past voiced its opposition to this tax, which it says has a cascading effect and is a mild form of double taxation, it does not expect the tax to be done away with completely.
The hope is that a reduction by Finance Minister P Chidambaram will send a strong signal and boost corporate sentiment.
Another strong possibility for Budget 2007 centres around the 10 per cent surcharge payable by companies as well as individual tax payers who have an income of Rs 10 lakh and more per annum.
The feeling is that the surcharge may be halved to 5 per cent, if not done away with completely.
There is also some talk about giving incentives to foreign companies in India that do not pay dividend in the country by reducing their tax liability.
At present, such companies are taxed at an effective rate of 41.82 per cent compared with the effective 33.66 per cent (apart from dividend distribution tax) liability of domestic companies and foreign companies that pay dividend in the country.
Questioning the necessity of the surcharge, Shyamal Mukherjee, deputy tax leader at PricewaterhouseCoopers said: This is the time to drop it or at least reduce it. Tax collections are growing and the government should re-examine the matter. After all, the surcharge was introduced several years ago as a revenue-generating measure.
The backdrop to all this is the robust growth in tax collections, both direct and indirect, this fiscal year. Chidambaram has himself hinted at moderation in tax rates, while simultaneously stressing the need to increase tax compliance.
If the trend witnessed up to November continues, revenue department officials say the party could well and truly begin.
The hope is that the Budget targets for total tax collection this year will be exceeded by over Rs 30,000 crore. Of this, 66 per cent, or Rs 20,000 crore, will come from direct taxes with the remaining being contributed by increased Customs and service tax collections.
Corporation tax collection neared Rs 60,000 crore in the period while income tax collection during April-November crossed Rs 40,000 crore and is expected to surpass the Budget estimate of Rs 77,409 crore.