Tax rationalisation on agenda, corporate tax to be cut by 1%

Sanjeev Sharma

Tribune News Service

New Delhi, February 24

The government has indicated that one of the focus areas of the Union Budget next week would be on tax rationalisation and simplification with the first tranche of cut in corporate tax by 1% while the exemptions will be removed.

Revenue Secretary Hasmukh Adhia said recently on phasing out of tax exemptions for industry that though the exemptions are given for a noble cause such as for promoting domestic industries to provide level-playing field or to achieve balanced regional development among others, there is a distortionary impact of such exemptions on the taxation system.

Adhia stated that currently the government forgoes revenue of about Rs 1 lakh crore in direct taxes and a similar amount in case of indirect taxes. This has a cascading impact on tax rates which are relatively higher in order to meet the overall revenue targets.

He said currently, 3.5 crore to 4 crore people are filing the income tax returns, and 1.85 crore to 2 crore people pay tax through TDS bringing the total number of the taxpayers close to 6 crore.

Morgan Stanley said in a note that on the direct tax front, corporate tax rate could be cut (along with reduction in exemptions). The requirement of MAT on special economic zones (SEZs) may be done away with, given the slowdown in external demand and contraction in exports.

Elara Capital said in a note that discretionary taxation has been a chronic problem in India and several special cesses and exemptions that were abstractly put in place to favour special interest groups need to be dismantled.

According to Motilal Oswal Securities, the relatively low tax-GDP ratio of India versus its peers leaves scope for higher incidence of taxes especially on the direct taxes front.

“We expect a fair bit rationalisation of taxes in the current Budget. On the direct tax front, we expect a reduction in base line corporate tax rate by 100-150 basis points to eventually bring it down to 25% in a phased manner by FY 19 as announced in the last Budget. However, this might be at the cost of elimination of some of the concessions on MAT, DDT, SEZ that are currently prevailing. Among others, we expect a significant change in rules governing the transfer pricing cases,” it said.

On personal taxes, Antique Stock Broking in a report said no increase in personal tax rates is expected. In FY16 Budget, the government had introduced an additional income tax deduction of Rs 50,000 for contributon to the New Pension System under Section 80CCD. There is a possibility that the government may increase the limit for tax deductions by another Rs 50,000 if the investment is in specified infra funds, thereby taking the total exemption to Rs 2.5 lakh.

In the pre-Budget meeting with Finance Minister Arun Jaitley, industry body Ficci said to ensure that there is no tax evasion, the government should consider making filing of returns and declaration of all incomes mandatory over a particular threshold, say Rs 10 lakh.

However, the share of direct tax mop-up is going down. According to a research by Citigroup, higher indirect taxes make the system regressive. It says that a more equitable fiscal policy would suggest reducing the share of indirect taxes in total tax collection. This ratio was brought down from more than 60% in FY01 to 40% in FY10 but has started increasing again after that. The FY16 ratio is likely to be close to 50% and in FY17 indirect tax collection might be higher than direct taxes (first time in 10 years), indicating a more regressive tax regime.