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Finmin sees no need to cut corporate tax
February, 01st 2007

Finance minister P Chidambaram is unlikely to pare corporate tax rates in Budget 2007-08. Industry chambers CII, Ficci and Assocham have long been demanding a cut in corporate tax rate to 25% to enable companies compete more effectively in the global marketplace.

India's closest competitors the Asean countries have tax rates ranging between 25% and 30%. In China, while the tax is levied at 33%, tax waivers to attract overseas capital bring it down significantly. So, foreign companies pay only 15% and domestic companies about 24%.

In the European Union (EU) too, corporate tax rates vary between 10% in Cyprus and 38.34% in Germany. Most EU countries levy corporate tax at about 25%. Various studies also show that the average corporate tax rate in 159 countries and regions stood at 28.6% last fiscal.Indian companies are taxed at 30%. In addition, they attract a 10% surcharge and a 2% education cess. The tax liability thus totals 33.6%. Foreign companies in India pay a higher 40%.

With a 2.5% surcharge and a 2% education cess, the effective tax rate turns out to be 41.82%. Budget 2007-08 is likely to be a mixed bag for India Inc. On one hand, the finance ministry may pare the tax surcharge or even do away with it, but on the other hand take away some exemptions. However, basic tax rates may remain at current level.

The last major revamp in the corporate tax structure was in 2005 Chidambaram's first Budget under the UPA when the rate was reduced to 30% from 35%. The surcharge was, however, hiked to 10% from 2.5%. While depreciation rate for new machinery remained the same, it was lowered for general machinery. Though these measures were to bring a relief of 3% in corporate tax rate, the benefits were partly offset by the fringe benefit tax.

In Budget 2007-08, a key proposal being mulled is to lessen the tax surcharge, as it would help soften tax rates. The move is on the back of record direct tax collections so far this fiscal.

While direct tax collections stood at Rs 1,82,880 crore till January 23, corporate taxes were the biggest gainers at Rs 92,463 crore, up 51.8% over the same period last fiscal.

What might upset India Inc more is the plan to prune a number of exemptions to the corporate sector. The thinking behind this proposal is that tax concessions merely weaken the effective tax structure, meaning a loss of revenue for the government.

A study by the finance ministry shows that tax sops to the corporate sector have reduced the effective burden on companies to just 17% almost half the actual rate of 33.6%. The government has over a period of time introduced a variety of exemptions including for backward areas, special economic zones, software technology parks as well as for developing and operating infrastructure facilities. While the finance ministry sees merit in continuing with some of these, it feels many of them may be done away with.

The proposal to prune exemptions is in line with recent statements of both Prime Minister Manmohan Singh and Chidambaram, who have hinted at reducing the number of tax sops to various sectors and sections. The government's plan seems to have the tax reformers' stamp of approval as well.

Mahesh Purohit, director, Foundation for Public Economics and Policy Research said, The corporate tax rate in India is comparable with other countries. The government must, however, work to bring corporate tax rates for foreign companies on a par with domestic companies.This would help attract more foreign capital to the country, he said.

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