The country has over 4.50 lakh registered corporate bodies, of which only 50,000 corporates pay taxes. A simplistic interpretation of this could mean that either these are inefficient corporates or there is income being concealed. Our endeavor is to reduce this, Bhide said at a CII seminar here on Tuesday.
In Budget 2009-10 the finance ministry has plugged a major loophole in the tax treatment of companies by reworking the provisions of the minimum alternate tax. Government officials told Indias automobile manufacturing hub that even companies that do not make profits will have to pay at least 2% of their total asset value as tax. The levy promotes efficiency in the private sector, said the officials in response to criticism that it will thwart new investments.
Bhide said among the tax leakages he had noticed was the special purpose vehicles that companies sometimes set up with the deliberate intention to avoid tax. These cannot be used as vehicles for concealment, he said.
The draft tax code proposes to do away with tax sops for companies. It has suggested replacing the current profit-linked incentives with investment-linked incentive for specific sectors, including special economic zones, exploration and production of mineral oil & natural gas and cold chain facilities.
The loss of revenue from tax sops given to India Inc has for long been a bone of contention with the finance ministry. Tax incentives cost the exchequer Rs 68,914 crore revenue in 2008-09 and Rs 62,199 crore in 2007-08, according to the Budget document. More importantly, despite the 33.99% corporate income tax rate, the effective tax rate of companies in 2007-08 was a mere 22.24%.
While public sector companies paid corporate tax at an effective rate of 25.69%, private sector companies had it easiertheir tax liability was 21.28%. Across sectors, sugar, power, pharma, and IT & BPO service providers pay the lowest tax in the range of 3% to 16%. The Budget document further reveals that the exchequer lost 11.36% of the total corporate tax collected in 2008-09, against 10.5% in 2007-08.
The Direct Taxes Code would replace the current Income Tax Act (ITA) with effect from April 1, 2011 and Bhide said the Bill to this effect would be tabled in Parliaments winter session. Reacting to corporates concerns about removal of tax sops to special economic zones, Bhide stressed that the code is meant to simplify taxation in line with international practices and is not an attempt to target any specific sector. The aim of the new code is to bring simplification and level-playing field for domestic and foreign tax players, he said.
DTC has to be seen in the revised context of global realities. We have to stop thinking of India as a piddly emerging power and think about India more in terms of a strong power. We have to learn to deal with this more efficiently, he said.
A few areas of concerns have been raised by corporates on issues, including SEZs and Minimum Alternate Tax. We are not here to destroy investments. But whenever we have to tax, the axe usually falls on companies that declare profits and they carry the burden of the corporate sector, which is very unfair, the revenue secretary underlined.
Most profit-linked exemptions related to SEZs are being eliminated but one has to understand that these are not WTO-compatible. An importing country now has the right to impose a countervailing duty on import of goods and services. So we end up losing taxes to the other country if the taxes are not paid in India. But for SEZ developers, the profit-linked incentives are being grandfathered and these units will have access to cheaper infrastructure, Bhide said.
Moreover, there would be a sharp fall in corporate tax rates from 34% to 25%. So one must look at the package in totality instead of saying that incentives are gone, the revenue secretary pointed out.
Reacting to companies concerns over MAT, Arbind Modi, joint secretary in the finance ministry, said, Under the new tax regime, even companies not making profits will have to pay at least 2% of their total assets value. This is intended to introduce efficiency in the private sector and plug the loopholes in payment of taxes.
Personal income tax is being brought down to 10% for income up to Rs 10 lakh per annum and 30% at the higher end. The IT industry has had a tax holiday for the last 20 years and must be mature enough to understand this. There are other emerging industries that could require support. We cannot endlessly support industries, Bhide said.