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Tax rates to dip, firms to pay more
August, 19th 2009

On the face of it, the recently proposed Direct Taxes Code is set to bring down corporate tax rates, but in effect, the government could well end up earning more revenue than it does now. That is because a set of exemptions that effectively reduce current tax rates will vanish under the code.

The Centre had foregone taxes amounting to Rs 68,914 crore in 2008-09 because of a plethora of exemptions. The code proposes that corporate income tax rate should be brought down to 25 per cent.

At present, firms are charged at the rate of 30 per cent and then slapped a 10 per cent surcharge and an education cess on top, together taking the taxation rate to nearly 34 per cent.

According to a Finance Ministry official, the effective rate of taxes paid by firms currently is 22.24 per cent after netting out the exemptions, based on a study of the actual tax paid.

The official said the income tax department had received 4,10,451 corporate returns filed electronically until March 31, 2009, which were studied.

The effective tax rate of the entire sample was 22.24 per cent, which was substantially lower than the statutory tax rate of 33.99 per cent, the official said.

Importantly, the effective tax rate for private companies were lower at 21.28 per cent as compared to government-owned companies that paid an effective tax rate of 25.69 per cent.

The tax code, which has proposed reducing the tax rate to 25 per cent, is predicated on the Laffer curve principle that says lower rates with a higher base of tax payers tends to increase revenues.

For many decades, the tax base has been eroded through a steadily escalating range of exemptions, the code says.

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