Many of India’s sectors have projected appreciable growth over the last financial year. This brings into further focus the key expectations corporate India has from Union budget 2018-19.
Globally, there have been significant developments in the international tax landscape, such as cooperation in addressing base erosion and profit shifting (BEPS) concerns. There have also been a number of developments when it comes to countries implementing changes through their domestic laws or tax treaty networks. India has played a crucial role as part of the BEPS implementation process and has been a pioneer while implementing the “equalization levy” in line with the BEPS’ “Action Plan 1: Addressing the tax challenges of the digital economy”.
Globally, while so much has been happening on the BEPS front, the US has—so far, at least—abstained from participating in the BEPS initiatives. Instead, it has pursued domestic tax reforms. To this end, among other things, it has reduced the corporate income tax rate from 35% to 21%.
It has introduced some other sweeping changes to domestic tax legislation as well—such as abolition of the alternative minimum tax (AMT), expensing of capital investment, limitation of the deduction for interest expense, etc. This has sent a clear message to US corporations.
It is a reiteration of US President Donald Trump’s oft-stated intention to move profits and jobs back to the US from foreign territories.
There are other changes affecting multinational enterprises which have also been introduced. These include fundamental changes to the taxation of multinational entities, including a shift from the current system of worldwide taxation with deferral to a hybrid territorial system.
This features a participation exemption regime with current taxation of certain foreign income, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion as well as promote US production.
This is likely to have a trigger effect on many developing and developed economies across the world. Cumulatively, the changes will positively have an impact on the flow of capital to US corporations from abroad.
Thus, these developments could very well go on to influence other global economies, including India, to take another look at their tax policies. Perhaps it will persuade them to take measures to make tax policies more business friendly in order to maintain the flow of foreign investments—important for achieving the projected growth rate of the economy.
Union finance minister Arun Jaitley, when presenting the Union budget 2015-16, mentioned kick-starting the process of a phased reduction of corporate tax rates from 30% to 25%, as well as phased elimination of exemptions.
Accordingly, the 2016-17 Union budget reduced the corporate income tax rate for financial year (FY) 2014-15 of relatively small enterprises (i.e. companies with turnover not exceeding Rs5 crore) to 29%. The 2017-18 budget, meanwhile, reduced the corporate tax rate for smaller companies with annual turnover up to Rs50 crore for FY16 to 25%.
It is worth noting here that the reduction in corporate tax rates in India has happened selectively; it does not represent a corporate tax reduction in a broad sense since it is applicable only to select companies. Against that, there has been a more than commensurate elimination of exemptions that has been implemented across quite a few sectors with effect from 1 April 2017.
Further, India is one of the few countries where, on account of additional levies like the surcharge and cess, the tax rates further increase. This has a spiralling effect on the overall tax cost of organizations.
It is important to bear in mind here that India, currently being at the stage of its growth trajectory that it is, needs a strong research and development (R&D) base if it is to mature as a truly technologically advanced economy. To provide the country with the wherewithal to establish itself as a manufacturing hub, industries here are still in need of support in terms of benefits by way of deductions and exemptions that should not be withdrawn so soon.
The exemptions could be eliminated in a gradual manner, keeping pace with the government’s promise to finally reduce the corporate tax rate to 25% across the rate. In addition, one needs to keep in mind that certain tax benefits—such as R&D-related incentives—for key priority industries are still the need of the hour if the government is to fulfil the promise of its “Make In India” campaign. And once the reduction of the tax rate to 25% is achieved, the government should contemplate a further reduction to 20% in a phased manner.
These measures will bring India in line with global competitive economies, where corporate tax rates have been trending downwards over the past few years.
Keeping an eye on the US corporate tax reforms, one would expect a reduction in headline corporate tax rates across the board in the upcoming Union budget to at least 25%. This would enable India to compete with economies such as the US when it comes to attracting investment.
India has been touted as a potential growth engine of the world for a number of years now. An absolute reduction in the corporate tax rate is important for delivering on this reputation and maintaining its position as a leading economy that has the potential to grow at around 7.5% in the short to medium term.