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ET EDIT-A Bold Reform on Corporate Tax Effective rate could come down even more

September 21, 2019 06:19 AM


A Bold Reform on Corporate Tax
Effective rate could come down even more
Finance minister Nirmala Sitharaman unveiled the mother-of-all direct tax reforms, proposing a cut in the corporate-tax rate for domestic companies to 22% and new domestic manufacturing companies to 15% against 30% now, provided they eschew exemptions and the minimum alternate tax (MAT). Adding surcharge and cess, the 22% rate becomes 25.17%. We welcome the basic principle of lowering rates to Asian levels, while doing away with exemptions. It will make large Indian companies much more competitive, leave them with more cash for investment, change India’s branding as a high tax jurisdiction and motivate global players to set up shop here.

Not unexpectedly, industry and markets have cheered the reform that brings down the effective corporate-tax rate by about five percentage points. Companies could be tempted to avail themselves of the new 15% rate for new manufacturing capacity. That would boost growth. Companies that do not opt for the concessional tax regime and enjoy tax exemptions will continue to pay at the pre-amended rates but can move to the new regime after their tax holiday ends. The tax burden (40% plus surcharge) has not been lowered for foreign companies, widening the gap in the tax rate between Indian and foreign companies. The anomaly needs to be corrected. Ideally, a uniform low corporatetax rate for domestic companies is simpler than multiple rates, and administratively less cumbersome. Surcharges must go. Sparing listed companies that have already announced buyback of shares before the Budget from the tax on buyback is welcome.

The giveaways will cost the government around ₹1,45,000 crore. If sentiments improve and investment activity intensifies and growth picks up, tax buoyancy could reduce that figure. If not, we are looking at a fiscal deficit that is a tad higher than the budgeted 3.3% of GDP in 2019-20. But that would be no disaster. The task is to simplify GST and get more companies on board, thickening the mesh of audit trails, whose analysis and follow-up can lead to much income amenable to direct taxes, both corporate and personal.

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