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India, Inc.'s effective tax rate only 17 per cent
January, 22nd 2007

It is well known that Indian industry has been clamouring for a lower rate of corporate tax. If you ask the finance ministry, the effective rate of corporate tax is a mere 17%, thanks to a panoply of tax breaks.

The actual tax burden is only about half the actual rate of 33.66%, says a recent finance ministry study on tax rates. Of course, the effective rate varies from sector to sector from a low of 11.7% in the case of information technology to 32.5% for paints.

For India Inc, the signals should be clear: some tax exemptions may go. Recently, Prime Minister Manmohan Singh spoke of withdrawing tax exemptions in the long run, in sync with what the finance ministry has been pushing for. And now, with this study on the effective tax rates, the finance ministry is armed with evidence to push for pruning of tax exemptions.

So will the corporate tax remain the same or be lowered in the coming Budget? While this can only be known in a few weeks, this is what the PM said at Ficci's AGM, Industry should hope to grow and conquer the world through global efficiency.

Since FY06, the statutory corporate tax rate is 33.66% and this includes the basic rate of 30% plus a surcharge and an education cess.

India Inc's effective corporate tax rate stood at around 16.5-17% in 2005-06, according to the analysis done by the finance ministry based on tax returns filed by corporates. This means on a profit of Rs 100 in 2005-06, corporates have paid Rs 17 as tax. But their outgo would have been Rs 33.66 as per the statutory tax rate.

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