Finance Minister Arun Jaitley while presenting the Union Budget for FY2016 had announced that corporate tax rates would be reduced from 30% to 25% over four years. In last full year budget prior to the 2019 general elections, India Inc is eagerly waiting to see whether the Finance Minister lives up to that promise. FinancialExpress.com decided to poll 21 leading economists, researchers and analysts to gauge whether Finance Minister Jaitley will substantially reduce corporate tax in line with the 25% commitment in Budget 2018.
Many agencies and chambers are of the view that corporate tax rate may be cut to 25% in Budget 2018. However, 12 respondents in the survey said that FM Jaitley will not reduce corporate tax. Rusmik Oza, Head-midcaps at Kotak Securities said, “At present, there is less visibility on how GST collections will rise in FY19. On the other hand, the government will need to spend heavily on infrastructure and agriculture sector. Taking this into consideration it looks difficult that corporate rates could go down.” Agrees Sachchidanand Shukla, Chief Economist of Mahindra Group. “GST revenues have not stabilised, hence there is lack of resources. I don’t think the government will have room to substantially reduce corporate tax rates in line with the 25% commitment,” Shukla said.
Budget 2018: FM Jaitley should honour his promise
Pressure to cut rates has been mounting this year as the Trump administration in the United States cut corporate tax from 35% to 21%. In line with this thought, 7 respondents in the survey said that Finance Minister Arun Jaitley will reduce corporate tax in the Union Budget. In FY15 the government did cut corporate tax to 29% for those firms which reported turnover of up to Rs 5 crore. In the subsequent year, the government reduced the rate to 25% for newly incorporated domestic firms. Siddharth Khemka, Head – Retail Research, Motilal Oswal, says: “We do not expect much relief on the tax front, except some reduction in the corporate tax rate for medium-sized companies. We expect the government to continue its commitment to reduce the corporate tax rate by lowering tax for companies with a turnover of up to Rs 2500 crore.”
In Budget 2017, the Narendra Modi government cut the corporate tax rate to 25% from 30% for smaller companies with annual turnover up to Rs 50 crore to make them more competitive. An economist from a financial institution was of the view that corporate tax should be reduced as it was promised earlier and the cost of capital in India is very high. “The Finance Minister has provided a longer-term trajectory on this and that needs to be honoured. The move, however, should be sequenced and in combination with the withdrawal of various exemptions granted for lower rates of corporate taxation,” said Sujan Hajra, Chief Economist at Anand Rathi.
Watch video: US tax reforms key to accelerating FM’s promise on corporate tax cut
US, UK reduce corporate tax
“On the tax front, the focus should be on reducing the effective tax rates. Globally, the Nations are competing to attract investment and boost business activity, to create jobs. Accordingly, the governments are reducing the headline corporate tax rate. Recently, the US, which is the largest economy has reduced its corporate tax rate to 21%. Earlier, the UK had also reduced its corporate tax rate to 19%, and there are talks to bring it down further to 17%. India had earlier announced to bring down the corporate tax rate to 25%, which is being done in phases. Probably, it’s time to make it effective for all corporates. Correspondingly, the tax rate for partnership firms and limited liability partnerships should also be reduced, to provide them with a level playing field. Similarly, some concession in the individual tax rates will leave more disposable income in the hands of the individuals and provide some cheer to the common households,” said Vikas Vasal, National Leader – Tax at Grant Thornton India.
Top business leaders from India Inc earlier this month had suggested lowering the corporate tax to 18%-25% in the pre-Budget meeting with FM Arun Jaitley. This suggestion was backed by top banker Uday Kotak, saying it is required to boost animal spirits of businesses. Jaideep Arora, CEO, Sharekhan is of the view that there could be some revision in corporate tax structure In Budget 2018 as part of the roadmap to rationalize corporate taxes in India over a period of time. “But given the fiscal constraints we do not expect substantial changes/revisions in this year,” added Arora.