While, presenting the union budget for 2015-16, finance minister, Arun Jaitely had announced that the corporate tax rate would be reduced from existing 30% to 25% over a period of 5 years. This was to be synchronized with withdrawal of all exemptions available under the existing dispensation.
In the budget for 2016-17, for new projects set up after April 2016, the tax rate was reduced to 25%. Further, companies with turnover less than Rs 5 crore were charged 29% plus surcharge. In 2017-18, the tax rate for small companies was further reduced to 25% even while increasing the qualifying limit to Rs 50 crore.
In the budget for 2018-19, Jaitely has given the benefit of 25% rate to all companies having annual turnover up to Rs 250 crore. According to him, this will cover 99% of the companies leaving only 7000 entities for whom the applicable tax rate will continue to be 30%.
He has justified not giving the benefit of reduction to larger companies [those with turnover > Rs 250 crore] on the ground that with various exemptions, already, they are paying effective tax of 20% or even less. Moreover, by reducing the rate to 25% for them too, the government would have lost an additional Rs 30,000 – 40,000 crore – on top of Rs 7000 crore forgone due to the cut applicable to smaller companies – which it cannot afford.
Meanwhile, US President, Donald Trump has reduced corporate tax rate steeply from existing 35% to 20% with a view to prompt American companies invest at home – instead of moving to other jurisdictions – and European countries too are following suit. In this backdrop, a hue and cry by Indian corporate [albeit large] about the government continuing with high rate was only to be expected.
So, what has led Jaitely to back out? He has argued that all existing exemptions/concessions have a sun-set clause and withdrawing them prematurely will tantamount to changing the policy with retrospective effect. That, this would upset the calculations on the basis of which concerned companies [read: those availing of exemptions] formulated their plans including capital spend etc.
So, according to him, the existing exemptions should be allowed to run their full course and only thereafter, the new policy of lower tax rate @ 25% [sans exemption] be implemented. This logic is self-defeating as irrespective of when the government puts the new policy in to effect, there would always be some entities who have not fully exhausted their quota of exemption.
For instance, consider a project is entitled to 10 year tax holiday from the date commencement of commercial production. Further, this benefit is available to all projects set up before March 31, 2020. Under this dispensation, a company can start a new project say on March 30, 2020 and would be eligible for exemption from tax up to March 29, 2030. Are we then to infer – going Jaitely’s logic – that the government will not introduce the new policy regime till that date?
No one can controvert the fact that the existing dispensation suffers from serious anomalies. There are a number of entities who may not be able to avail of the concessions at all or avail partially. On the other hand, others who are able to avail in a wholesome manner reduce their tax incidence to a much lower level. In other words, the system is discriminatory with varying tax liability on individual corporate depending on their ability to leverage exemptions.
The system also puts smaller companies to a disadvantage [despite the benefit of lower tax @ 25% in this years’ budget] vis-à-vis larger companies availing of exemptions/concessions. Moreover, the revenue forgone under extant dispensation would be several times more than the amount forgone under a scenario wherein the government imposes 25% tax across the board but with no exemption.
The concessions make our laws complicated requiring extensive/cumbersome documentation by companies and concerned ministries/departments of the government. It gives lot of discretion to the bureaucrats and hence, susceptible to nepotism and corruption. It also leaves ample scope for judicial intervention – courtesy, multiple interpretations of provisions relating to exemptions.
There is an urgent need for implementing the promise for reduction in corporate tax rate to 25% along with withdrawal of all exemptions. As regards, companies already availing of concessions, they may be given the option of either continuing with these or opt for the applicable lower tax in which case, they will have to forego the concession for its remaining term [it is anomalous to let them enjoy both]
The new tax regime will be simple, easy to administer and non-discriminatory. It will be free from all maladies afflicting the existing dispensation. This will also push industries in to looking for more sustainable avenues [e.g. increase in efficiency and reducing cost] for improving their competitiveness in the global arena; instead of banking on exemptions/deductions etc.
The government can also utilize this for fostering more efficient allocation of resources. The scarce capital will then be allocated on the basis of where it delivers best return unlike existing structure wherein it gets influenced by exemptions.
Further, with less resources foregone [money saved from withdrawing concessions will far outweigh the loss due to the 5% tax cut], the government will be able to spend more on welfare schemes for majority of the poor. Without doubt, the new direct tax architecture can be leveraged for promoting inclusive development and reduce inequalities in distribution of income.
Team Modi could have delivered on this major reform within its term. But, it has missed the opportunity. Whether, the new government post – 2019 elections will take it forward?One can only wait and watch!