Reduce corporate tax but let exemptions stay, India Inc's appeal
February, 16th 2016
Reduce the tax rate but let exemptions stay: that is India Inc’s appeal to Finance Minister Arun Jaitley in the upcoming Budget. Apex business chambers, the Confederation of Indian Industries (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI), have made a fervent appeal to the government to lower headline tax rate from the current 30% while also pleading for myriad tax exemptions to stay. FM Jaitley during 2015-16 Union Budget had promised a phased reduction in corporate tax to 25% from 30%FM Jaitley during 2015-16 Union Budget had promised a phased reduction in corporate tax to 25% from 30%
In the last Budget, Jaitley had promised a phased reduction in corporate tax rate from 30% to 25% over a four year period but had inserted the caveat that this will be accompanied by a phase out of various tax exemptions. Already, analysts have predicted that the two actions together could mean that the effective rate of taxation on companies would only go up – at a 30% headline tax rate, the effective tax companies now pay is at an average of just 23.4% due to various exemptions.
India Inc is of course justified in seeking lower taxation but it is the timing of this plea which invites comment. Just earlier this month, the Prime Minister had mocked the very terminology which defines concessions to companies as “incentives” while terming concessions to the poor and farmers as “subsidies”. This could be indicative of the kind of Budget Jaitley will present in a fortnight from now. Farmers have been struggling with two back-to-back years of droughts and the government would be justified in considering their woes on priority this time around. Besides, amid all round fears of the FM struggling to stick to his own fiscal consolidation target, would he find avenues to lower headline corporate taxation while also offering myriad exemptions? In 2013-14, corporate tax revenue was 21% of the government’s total receipts – by no means a small contribution to the revenue kitty.
CII has recommended in its pre-Budget memorandum that the corporate tax rate should be brought down to 23% (all inclusive) and that a roadmap for phasing out exemptions should be given to stakeholders. It is not clear if this recommendation is about headline or effective rate of corporate tax. Ficci meanwhile has said 25% rate should include education cess and surcharges while pointing out that exemptions’ phase out should not be “on a lock stock barrel basis” across sectors.
“There are various sectors where the turnaround time for the companies to reach a break even and start earning profits takes longer than some other industries….. There would be certain entities which would have recently commenced commercial operations, and now will have to tackle phasing out much faster than anticipated and planned. Thus, the phase out of deductions and exemptions should be applicable in a selective manner and beyond that which would consider the sensitivity of various industries.”
At a manufacturing seminar at FICCI last week, Planning Commission member Bibek Debroy had indicated that a reduction in corporate exemptions was coming this year. “Taxation rates and cost of compliance cannot be lowered as long as there is a barrage of exemptions. The FM has said phasing out corporate exemptions is linked to lowering in peak (corporate tax) rate from 30% to 25%. But this (phasing out exemptions) will mean an effective increase in effective corporate taxes,” he said.
But Professor at the Parish School of Economics, Thomas Piketty, has warned the government against cutting corporate tax rate to 25% saying this could be dangerous for India in the long-run. He said history showed that there is constant pressure on governments to gradually bring down corporate tax rates, which potentially increases the income gap between large corporate houses on one hand and small, medium enterprises on other hand. Some reports have suggested that Jaitley may pare tax breaks on sectors like research & development on projects in underdeveloped regions while also inserting a sun set clause for tax breaks in sector such as SEZs. As of now, profits from SEZ exports are exempt from corporate tax, while only the minimum alternate tax (MAT) is levied on book profit and this too is recoverable in the future. Infrastructure projects also similarly only pay MAT while R&D companies enjoy tax holidays.
Girish Vanvari, head of tax at KPMG says pulling the plug on corporate tax exemptions is “not a great idea now when the global economy is slowing down. Industry needs to be supported. Focus should instead be on widening the tax base”. Another taxation expert points out that widening the taxation base could include taxing farm incomes, enhanced efforts to unearth black money and in resolving tax disputes. According to estimates, as much as Rs 6 lakh crore is stuck in tax disputes.
Anyway, the Finance Minister’s key concern on corporate tax rate may have to do more with perception rather than actually taxing companies more. Remember, corporate tax rates are much lower than the 30% rate in India in most countries of Europe and Asia. But then, there are minimal exemptions in these countries, effectively simplifying the tax regime. The attempt of the government is to reduce headline tax rates, curb exemptions in a bid to align India more with global economic realities.
Rajesh H Gandhi, Partner Tax at Deloitte Haskins & Sells says he expects a token reduction of 1% in the headline rate in this Budget with the FM also bringing in some clarity on the plan to phase out exemptions from April 2017. “This way, companies will be better prepared to deal with exemptions’ withdrawal”.
Will Jaitley manage to please all – the subsidy needing poor as well as India Inc – by not trimming subsidies and also leaving corporate exemptions intact? Sandeep Chaufla, Partner at PwC, says the expectation is that there would be a decrease in headline tax rate by 1% “without disturbing existing exemptions and deductions”. If that happens, the ‘suit boot ki sarkar’ jibe of Rahul Gandhi may lose much of its sting since the government would have moved on from an ‘either or’ debate over subsidies versus corporate exemptions to look after both segments of the economy.