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Lower the corporate tax rate
February, 23rd 2016

India’s growth pace is among the highest in the world yet there are many challenges confronting the economy. Faster growth and stability rests on the three pillars of boosting government expenditure, reviving private sector investments and raising consumer spending.

Given that gross fixed capital formation has dropped from 34.3 per cent of GDP in 2011-12 to 31.6 per cent as per Advance Estimates, both the government and the private sector must step up investments across sectors, especially in the critical infrastructure sub-sectors of roads and highways, railways, irrigation and power. While increasing expenditure, the government should take care to maintain the fiscal deficit target as per the FRBM Act at 3.5 per cent of GDP.

This would be challenging but can be achieved if the budget taps sources such as divestment, widening the tax base, and funds available with public sector enterprises. Insurance companies could step up investments in infrastructure as well. The budget can also save on subsidies by placing more of them on the direct benefit transfer route.

Private sector investments have been impacted adversely by delayed projects, slow bank lending and subdued consumer demand, especially in the rural economy. An improved format for private participation in large infrastructure projects is needed. Existing stalled projects may be renegotiated while care should be taken in new projects to allocate risks appropriately and facilitate pre-approvals.

The credit cycle can be kickstarted if a National Asset Management Company is set up to take over non-performing assets from banks and resolve them. Banks also need capital infusion and further reforms as under the Indradhanush seven-point action plan which could be accelerated.

A key recommendation is to introduce the roadmap for lowering corporate tax rate as announced in the previous budget. We have suggested that a rate of 22 per cent would be aligned to global development towards lower tax rates and incentivise investments and employment creation. At the same time, the Minimum Alternate Tax should be eliminated or reduced to 10 per cent from the current rate of over 21 per cent. There is also need to revisit the Dividend Distribution Tax.

The Goods and Services Tax requires fast-tracked implementation and we hope that legislators would be able to pass the related bill at the earliest as this tax reform would add substantially to the growth rate. Among other indirect taxes, there is need to examine anomalies in customs duties and some inverted duty structures arising out of free trade agreements with partner countries. The service tax and excise duty may be maintained at current levels.

The Tax Administration Reforms Commission has made important recommendations and the government could evolve a roadmap for identification and implementation of specific areas in a transparent manner. Implementation of other policies such as Advance Pricing Agreements (APA) schemes, Authority for Advance Rulings (AAR) functioning and a committee for trade and industry would contribute to ease of doing business.

The budget would also need to look at reviving consumer spending and demand through tax measures such as enhancement of investment limits under Section 80C of the Income Tax Act and expand exemptions for spending on education and healthcare. A key sector with high multiplier effect is low-cost housing and added interest payment incentives could create new demand. The Seventh Pay Commission outgo may be staggered over two years to minimize the fiscal impact and also contain inflationary spikes.

Creation of infrastructure in the rural economy on a large scale, particularly in rural roads and irrigation can help rejuvenate rural demand. Increased government spending on education and healthcare along with specific attention to quality outcomes and capacity building would add to this effort. With these steps, the Indian economy would be on a stronger growth foundation.

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