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Corporate tax rate may be lowered to 25% for bigger Indian companies
May, 01st 2017

The finance ministry is considering a plan to extend the benefit of a lower 25% corporate tax rate to relatively bigger companies in 2018-19, a person privy to early discussions in the government said.

The tax rate for companies with annual revenue of less than Rs50 crore a year was reduced to 25% from 30% in the Union Budget for the current fiscal.

With tax revenue growth surpassing expectations in 2016-17, the government is now planning to raise the revenue eligibility for companies to anywhere between Rs100 crore and Rs500 crore subject to revenue implications of the move at the time of finalizing the budget for 2018-19, the person said on condition of anonymity.

Finance minister Arun Jaitley in 2015 first proposed to cut corporate tax from 30% to 25% over the next four years.

The government plans to cut the tax rate to make Indian companies globally competitive and attract more investments to the country. Lowering the tax rate will become easier for the government as the tax base widens and compliance rate increases.

The central government’s total tax receipts rose 18% to Rs17.1 trillion in the year ended 31 March, beating even the revised estimate made in February 2017 of Rs16.97 trillion, the finance ministry said on 4 April. As part of the plan to lower rates, the government had in 2016 lowered the corporate tax rate by one percentage point to 29% for companies with revenue up to Rs5 crore and also announced a concessional tax rate of 25% to new manufacturing companies that do not avail of any exemptions.

Subsequently, in the 2017-18 budget, Jaitley extended the 25% tax rate to all companies with up to Rs50 crore sales. The idea now is to include mid-sized corporate tax payers. Their effective tax rate is higher than large companies which avail of various tax breaks to keep their effective tax rate lower than the nominal rate of 30%.

“Next year, depending on revenue implications, we could raise the bar to Rs100 crore to Rs500 crore,” said the person cited above.

Tax experts welcomed the move.

“Any incremental step affirming the government’s intention to move in the direction of a promised globally competitive 25% corporate tax regime is welcome,” said Rahul Garg, partner (direct tax) at PwC.

In the case of personal income tax too, the government lowered the rate in 2017-18 budget from 10% to 5% in the lowest income slab of Rs2.5 lakh to Rs5 lakh.

Steps to widen the tax base have resulted in rising compliance levels, including in personal income tax, another person briefed about the trend said, on condition of anonymity.

The number of income tax return filers has increased to close to 50 million as on 31 March 2017, said the second person citing provisional numbers. There were only 39 million tax return filers (including 700,000 companies) in financial year 2013-14, according to official data released in October 2016.

The number of “income tax payers” is higher at about 65 million, as on 31 March 2017, as several salaried individuals whose taxes are deducted at source by employers do not file income tax returns.

Although tax breaks is a major cause of disputes, dropping large personal income tax incentives, such as exemption given to savings, may not be easy for the government. The income-tax department is keen to trim exemptions and lower the tax rate as the revenue collected would be the same at a lower rate on a bigger chunk of income. However, other arms of the government keen to channelize savings into the economy are unlikely to favour such a move.

Federal policy think tank Niti Aayog had in its three-year action plan circulated among states on 23 April recommended weeding out personal income tax exemptions in a bid to widen the tax base.

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