Tuesday, November 06, 2012

Just a tax cut by the MoF and India Inc. would take care of our existing socio-economic ills!!!

This New Year brings some outstanding news for the Ministry of Finance, as direct tax collections have gone up by a staggering 40% for the period from April 1, 2007 to December 15, 2007. Though year on year the direct tax collections have been growing, but that has been nothing like the manner it has grown this year. In fact, the net tax collections stood at a whopping Rs.164,407 crore, up from Rs.115,377 crore during the same period last year (a growth of almost 42.5%; achieving almost 62% of the budgeted direct tax revenue for the current fiscal). And the bigger news is – of this overall collection, corporate tax alone has registered a growth of 42.37% with respect to last year.

So, as the coffers of the Ministry of Finance are jingling, the old debate of reduction of corporate tax rate has again come to the forefront. And speculations are ripe that the Ministry might bring down corporate tax rates from the existing 30% (in fact 33.99%, if one takes surcharge & cess into account) to 26% in the forthcoming Union Budget. No doubt, there is definite merit if the Ministry finally decides for the cut. Since some time now, there has been a considerable debate in terms of lowering the rates in order to provide a level playing field for all, which is not the case right now, as the effective tax rate for a domestic company currently is higher than what a foreign company operating in India pays (if one takes dividend distribution tax into account). Other than this, it has been noted that though India, off-late, has been receiving considerable foreign investments, this could further grow if the Ministry could rationalise the corporate tax rates in the global context. According to a KPMG report, the average corporate tax rate in the European Union stands at 25.04%, whereas for the Latin American region, it is around 28.25%, and for the Asia Pacific region, it is around 30% (with China at 25%, Singapore at 18%-20%). In addition to all these reasons, cutting down the tax rates would also help in enhancing compliance and at the same time help in expansion of revenues for the Ministry. In fact, all the rationalities overtly indicate that such a step would not only reap huge dividends for the government but would also boost India Inc. and the nation as a whole.


Source : IIPM Editorial, 2012.

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