Taxes’ have been making the headlines very often in the recent past both in India and internationally mainly on account of the conflicting objectives of the tax payer and the tax collector, with the former wanting to minimize his tax cost and the latter wanting to maximize his tax revenues. In order to have a conducive tax environment, it is imperative that the tax laws are simple to understand and administer and that the tax rates are moderate. It is also equally important to instill a sense of equity and responsibility in the minds of the taxpayers which can be achieved if tax proceeds are employed in a productive manner leading to a better standard of living for the common man and business friendly economic environment for the corporates.
India presently has an effective corporate tax rate of close to 34% (inclusive of surcharge and cess) which is among the highest in the world. In spite of the same, the effective collection of corporate tax rate is around 25% of profits which is primarily on account of plethora of incentives provided under the Income Tax Act and due to tax evasion.
One of the primary reasons to introduce such concessions/ incentives was to promote certain identified industries, certain geographical areas etc. after considering the socio-economic objectives many of which have outlived its utility.
Recognizing the aforesaid, the Union Finance Minister, Arun Jaitley during his Budget speech of 2015, announced the intention to bring down the headline corporate tax rate from the existing 30% to 25%, along with a phase out of the various corporate tax incentives over a period of four years.
While the Union Budget 2016 did not see any reduction in the headline corporate tax rate, it did announce certain measures to action the aforesaid intent by proposing a 25% tax rate for new manufacturing companies (provided they do not claim exemptions), providing a sunset clause for Special Economic Zones (SEZ) and skill development exemptions to name a few.
In the upcoming Union Budget 2017, one can expect the government to announce a marginal cut to the headline corporate tax rate along with a clear roadmap detailing the manner in which the proposed reduction and incentive phase out will be achieved.
However, considering the stated intent of the government to promote its flagship programs such as ‘Make in India’, ‘Start – up India’, ‘Digital India’ etc, one can expect the government to continue incentivizing these initiatives through tax benefits with appropriate sunset clauses.
One also expects the government to come out with clarity on various contentious issues surrounding indirect transfer of shares, the manner in which General Anti Avoidance Rules (GAAR) would be implemented and also final rules on place of effective management to provide a certainty to the international investor community on the future of the tax regime in India.
The widening of the tax base by the gradual phase out of exemptions, expected buoyancy in tax collections on account of demonetization, ambitious disinvestment plans along with the impending implementation of the Goods and Services Tax (GST) should hopefully give the government the fiscal room to bring down the corporate tax rate to 25% over the next two to three years.
While corporate India will closely watch the Finance Minister’s Budget speech of 2017 on a number of parameters with expectations, the reform process is expected to be gradual rather than radical with policy measures being taken both within and outside of the budget to steer India to a path of simple and a stable tax regime.