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Govt may cut corporate tax rate to 26% as collections rise
December, 14th 2007

The comfort provided by the robust growth in tax collections this fiscal may well prompt the government to weigh the option of pruning corporate tax rates something that India Inc has been asking for a long time. With direct tax collections growing at well over 40% this fiscal, largely thanks to good corporate earnings and increased compliance, the government is evaluating a proposal to actually reduce corporate tax rates, according to revenue department officials.

One option is to slash the statutory rate which is now 30% to close to 26%, while retaining the surcharge and education cess. Indias corporate tax rate now works out to 33.66%, after factoring in a surcharge of 10% and the education cess of 2% on top of the statutory rate. Reducing the statutory rate would imply a lower tax payout even if the surcharge and cess are retained.

It is clear, however, that a decision on reducing tax rate will hinge on the elimination of a host of exemptions which Indian companies now enjoy and an acceptance by the government that tax compliance has indeed improved. The government and the finance minister, in particular, have been of the view that although the statutory rate is 30%, the effective rate for companies works out to just a tad over 19%, after taking these exemptions into account.

Therefore, any cut in rates would have to go hand-in-hand with the elimination of these exemptions, the revenue department has argued. A cut in rates, if any, could also depend on the realignment of rates in personal income tax rates. Political developments, at the national level, could also have a bearing on the decision.

Prospects of an early poll next year ahead of the full term of the UPA government may well influence the decision to prune tax rates. For the government, there is a cushion this time in the form of buoyant tax revenues, if it opts for rate cuts. Direct collections grew 43% in April-November this fiscal.

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