NEW DELHI: The government is likely to tinker with personal income tax rates in the upcoming Budget, which should increase compliance and on balance have a neutral impact on tax collections. However, given the resource constraints, the possibility of meaningful revision in direct tax slabs remains minimal, Morgan Stanley Investment Management said in a research report today.
It said indirect tax revenue growth is expected to be adversely affected as the incremental gains from fuel excise duty hikes normalize. However, the possibility of an increase in the service tax rate to align with the GST rate structure may nullify the impact.
According to the report, the trend in tax receipts in F2017 has picked up pace. They have grown above budgeted levels, mainly thanks to the full annualized impact of excise duty hikes on gasoline products and higher service tax rate. Indeed, tax revenue is expected to rise to 11.3% of GDP in F2017 from 10.7% of GDP in F2016, mainly pulled up by higher excise collections – incremental oil excise duty hikes are estimated to add ~0.5% of GDP in F2017.
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Keeping this in view, here’s what Morgan Stanley expects from the Budget on the taxation front:
Indirect taxation: In F2018, indirect tax revenue growth could face opposing forces – adverse impact from normalization of fuel tax hikes and positive effect as economic recovery gathers momentum. Moreover, there is a possibility that the service tax rate could be increased from the current level of 15% to align it with the GST tax rate slab (expected to be around 18%).
We believe that the government is likely to do the same, once GST is implemented (likely by July 2017) and thus F2018 could get a boost in service tax revenue from higher tax rates. On the excise duty front, if oil prices were to rise US$10/bbl, then we estimate that the government might need to roll back excise duty of INR3.5-4/lt on petrol and diesel – implying a revenue loss of approx. 0.25% of GDP.
Personal income tax: It is widely expected that the government is likely to reduce personal income tax or increase exemption limit, especially after the currency replacement program. The government has been focusing on increasing the tax base, since only 36.5mn or 3% of the population file income tax returns. In this context,a reduction in the tax rates should help with the government’s objective of greater compliance. At the same time, it would also give a boost to disposable incomes. However, given the resource constraints, the possibility of meaningful revision in direct tax slabs remains minimal.
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Corporate tax: The government has committed to lowering the corporate tax rate along with rationalisation of the exemption. It is thus likely to reduce the headline corporate tax rate for F2018. Recall that in the budget last year, a lower corporate tax rate of 25% was introduced for new manufacturing companies incorporated on or after 1 March 15 2016, provided they do not claim other exemptions in the 2016 budget. The corporate tax rate was also lowered to 29% for companies with turnover not exceeding INR 50mn. However, the general corporate tax rate remained at 30%.