Move on to a single corporate tax rate

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: In about two week, finance minister Pranab Mukherjee will present the Budget for 2009-10. It would be his first full Budget after a gap of 25 years. While presenting this Budget, Mukherjee will be confronted with large demands on expenditure for fulfilling the promises made in the election manifesto. Since this will affect the burgeoning fiscal deficit, it is important that the government find ways to mobilise further resources for meeting the populist demand and funding the growth targets through enhanced investment in infrastructure. Also, it is the most appropriate time to take some bold steps to introduce reforms in the corporate income tax as well as in personal income tax.

In recent years, many countries have reduced their corporate income tax rates. In fact, many countries now have a single tax rate. Therefore, India needs to fall in line. While the corporation tax rates in India are 30% for domestic companies and 40% for foreign companies, inclusion of surcharge and education cess makes the total tax rate to be about 33.66% for domestic companies and 41.82% for foreign companies. Although, taking into account the exemptions and incentives for directed investments, the effective rate of tax is about 20.6%, it is useful that the surcharge (being temporary in nature) is removed to make the businesses internationally competitive.

The fact that the imposition of dividend distribution tax has already weakened the case for dual corporate tax, it is important to rationalise the Indian corporate tax by reducing the gap between the tax rate of the domestic and foreign companies.

Also, it is important to make a thorough study of the tax-expenditure to analyse the exemptions and to remove them wherever possible.

It is noted that such exemptions tend to make tax-planning easier and help avoiding tax (nearly 50% is lost).

More importantly, it is time to simplify the tax system to make the tax compliance easy. This will bring into the tax net many small and medium companies operating in the informal sector owing to the complexity of the tax structure.

In personal income tax, first of all, the exemption limit for income tax for individuals is raised by at least Rs 50,000. This will take out a large number of small tax payers from the tax net, reducing the administrative cost of the department.