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Corporate tax cut not likely in Budget
February, 10th 2010

The government may not tinker with the corporate tax rates in the Budget 2010-11 despite pressure from India Inc to slash rates or at least do away with surcharge and cess.

The industry has been clamouring for a reduction in corporate tax rate to 25 per cent from the current over 30 per cent, including education cess and surcharge. Corporate tax rates could be kept at the same level and the industry may have to wait for fiscal 2011-12 for the rate to be 25 per cent as proposed in the draft direct taxes code, said a senior Finance Ministry official.

Currently, domestic firms earning total income of over a crore in a year have to pay corporate 30 per cent tax. Besides, surcharge of 10 per cent and education cess of 3 per cent are imposed on them, taking the total tax liability to 33.99 per cent. Those earning up to Rs one crore of income draw a total tax liability of 30.9 per cent.

"Rate changes are unlikely in the Finance Bill 2010", global financial consultancy firm Ernst and Young tax partner Sudhir Kapadia said. He, however, pointed out that the government could go for a bold move like the abolition of the surcharge and cess, and introduce a flat rate of 30 per cent.

The government may not reduce the corporate tax rate, as these could only be pruned, if exemptions and concessions given to various sections are lowered, the official said. This will be done through Direct Taxes Code, which is likely to replace the Income Tax Act from 2011-12 fiscal. However, a bill to this effect is not likely in the budget session of Parliament that commences from February 22.

Even as the government may retain corporate tax at the current level, there are speculations that the budget to be tabled in Parliament on February 26 could partially roll back fiscal stimulus given to the industry.

While service tax was cut by 2 per cent, excise was slashed by 6 per cent in two tranches to spur the slowing economy, after the global financial crisis deepened. This yielded dividends and the economy grew by stunning 7.9 per cent in the second quarter of this fiscal, against just 6.1 per cent in the previous quarter and 5.8 per cent each in the previous two quarters.

However, this widened fiscal deficit to over 6 per cent last fiscal against budget projections of just 2.5 per cent of GDP. This fiscal, it is pegged at 6.8 per cent of GDP. However, industry has demanded not only continuation of stimulus measures till the economic recovery is on firm ground, but also reduction in corporate tax rate, or surcharge or education cess.

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