Given how India’s corporate tax rates are amongst the highest in the world, and more so in comparison with competitors in South East Asia—China is 25%, Indonesia is 20% and Singapore 17% as compared to India’s 30%—it is not surprising the government should want to bring this down. And, given the precarious tax position, it is also not surprising the government would want to phase out this reduction over a period of time. So, from the current corporate tax rate of 30%—this becomes 33.2% once you add the surcharges—the government wants to bring down the rate to 25% over the next four years. It is not clear why the markets rose as much as they did on budget day in response to this statement by finance minister Arun Jaitley since, as he said, this was to be matched by a reduction in the number of exemptions. As Jaitley said, while the corporate tax rate was 30%, the effective rate was more like 23%—so, in effect, over 4 years, the government is actually planning to hike the tax rate. The only interpretation, therefore, is that companies find it better to have a well-defined tax rate instead of the plethora of tax exemptions which are so complicated, availing them also results in a very large number of tax disputes.
While the direction of the phasing out is a good thing, the lack of details is only going to make things worse; which is why there has to be a detailed road map for how taxes are to be cut and the exemptions phased out. So, are the taxes to be cut by an equal amount each year, that is, by 1.25% each year, or will the tax position of the government decide how much will be cut that year? Since companies do long-term planning, it is vital they actually know what their effective tax rates are going to be. The situation gets worse when it comes to the exemptions. There is, to begin with, a problem about how much the exemptions actually add up to. Since the budget gives a number of R62,399 crore for exemptions in FY15 as compared to the actual collections of R4,26,079 crore for that year, this means the taxman collects 87.2% of the total tax due—if you take the 23% and 30% numbers given by the finance minister, this tells you the tax man actually collects just 76.6% of the total tax due.
But ignore this since the calculation is messed up by including the dividend distribution tax as well as the minimum alternate tax—the gross exemptions are put at R98,408 crore which is then reduced by net MAT collections of R33,351 crore—and look at the exemptions the Budget details. Accelerated depreciation is R37,010 for FY15, SEZ exemptions add up to R18,394 crore and there is another R10,607 crore of Section 80-IA benefits to power generation companies. Which one of these benefits is going to be removed first and which next, and at a fourth each over each of the next four years, or will the phase out be different? And what about the promises made on the basis of which the investments were made? How are firms to make their future plans? All of which suggests not enough thought was given while announcing the proposed reduction. Hopefully, the government will now make amends and come out with a detailed plan.