India Inc wants Finance Minister Arun Jaitley to reduce corporate tax rates to 25%. In fact, CII has pitched for corporate tax to be brought down to 18% and emphasised that more needs to be done to strengthen India’s dispute resolution mechanism.
Gaurav Karnik, Tax Partner & Real Estate Leader, EY India shares his view on what is likely to happen on the corporate tax front: “The Finance Minister, in his first Budget, had already announced a road map of 25% to be implemented over a 4 year period. The expectation is that 25% is what he has agreed to and in my opinion, it is unlikely that he would not go below that on the corporate tax rate. In this year’s budget, I don’t think the FM is going to make a drastic cut from 30% to 25%. That’s a large amount of change that is required and he may not have the budgetary/fiscal resources to support it. But I would think that there could be 2 or 3 % cut on 30%. CII’s pitch for bringing the corporate tax down to 18% is very much an aspirational rate..that’s quite a low rate and if at all the 18 number that could be achieved is the MAT rate…which is today 18.5 plus surcharge which is over 20 %. One could look at the MAT also going down…Therefore the gap between the corporate tax rate and the MAT rate is not so significant.”
Comparing India’s corporate tax rates with other Asian ‘tiger’ economies, Gaurav Karnik believes that India’s corporate tax rate is amongst the highest in the world.
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“If you look at Singapore, it is around 17%. If you look at Vietnam, it is around 17 to 20%. Clearly, they are lower than India. In this world of tax competition, there will be a need to cut the tax rate. And I think the bigger problem is the US cutting its tax rate down…as President Trump has been saying…once the tax rates comes down in US, it is going to be a serious competition for the rest of the world. Therefore, this budget will clearly force the FM to have to re-look at the corporate tax rate and come up with a significant cut,” he says.
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Gaurav Karnik further explains “If the US tax rates come down, they are significantly high they are over 40%. If they come down to the rates Trump is promising, then that will signal a shift. There will be a lot of competition from the US for competing resources. Clearly, there is a need to cut the corporate taxes rate and given the current circumstances which are there and also what the industry expects..there should be a cut in the corporate tax rates.”
When asked about how successful the Narendra Modi government has been in making ease of business a reality, he stated, “I think a lot of changes have been made electronic. A lot of filings have been made electronically. In the income tax act, from last year we have been allowed to file submissions electronically. One does not have to go to the ITO, if one does not want to. That is a real change. Another thing from ease of doing business, single window clearances in is as many sectors as possible is required. Especially manufacturing, where it takes time to set up a factory, single window clearance would really work. Another sector which can create jobs and really impacts the GDP is real estate. There also we have a plethora of approvals. That is really a case where you need a single window clearance as well. So I think manufacturing and real estate, if they can have single window clearances..one could really make a change in the ease of doing business and then we can go up the rankings.
While getting stuck in litigation has been a major pain point and a nightmare for most companies that look to set up businesses in India, Gaurav Karnik believes that since the new government has come in, the tax authorities have been less adversarial. He cites the APA programme (Advance Paise Agreement), which has been a significant success, following which more companies opted to go in for the programme and the tax authorities have been very reasonable in their judgments.
“Last year, there were some more changes brought in. So in case of disputes on certain tax demands, and there were certain thresholds at which the tax authorities had to go for an appeal or not to go for an appeal. So clearly from the Ministry’s side also there has been an attempt to reduce litigation and I think the attitude of the Govt has been to end it or reduce it to the extent possible. A suggestion that we have is that from the Authority of Advance Ruling, has only one bench in Delhi. I think there is a need for more and the FM had announced a couple of budgets ago that there would be more benches for the Advance Ruling Authority and I think he has to operationalize this year and ensure that there are enough adequate members on those benches for the said Advance Ruling Authority. So AAR is basically taken in for a particular transaction which is going to take place. So in advance of a particular assessment taking place, you get a ruling from the AAR. The result? It cuts litigation and brings tax certainty,” he explains.
Also, more benches mean that disputes are resolved faster and in a time-bound manner. This spells good news for companies because they look towards speedy resolution of legal disputes, which is a reason why Singapore and other Asian countries are preferred investment destinations.
So, yes, Corporate India is pitching for lower tax rates. Will Finance Minister Arun Jaitley oblige and if yes, to what extent? Let’s wait and watch as we are just few hours away from Budget 2017-18!