Budget 2018: Union Budget 2018 is around the corner and the expectations from India Inc are high, given that our corporate tax rate is among the highest in the world, particularly when we make a comparison with other Asian economies.
Budget 2018: Union Budget 2018 is around the corner and the expectations from India Inc are high, given that our corporate tax rate is among the highest in the world, particularly when we make a comparison with other Asian economies. Currently, companies are known to pay a base rate of around 30 percent corporate tax – this further means that when coupled with cesses and surcharges, the total tax burden is pegged closer to 34.5% or slightly more. Given this scenario, India Inc is pitching for lower rates to be announced in the Union Budget 2018.
Will Finance Minister Arun Jaitley oblige and if yes, to what extent? Last year, while presenting the Union Budget 2015-16, Finance Minister Arun Jaitley had mentioned that the government is committed to kickstarting a process of phased reduction of corporate taxes and a phased system of eliminating exemptions. So, what can we expect this year in the context of corporate taxes?
Roadmap to bring down Corporate Tax
Sharing his views on what is likely to happen in Budget 2018 on the corporate tax front, Gaurav Karnik, Tax Partner and Real estate Leader, EY, told FE Online, “The Finance Minister had already committed to bring down corporate taxes down to 25% over a four year period. However, the point is that some of the added events which happened such as the US tax reforms which has reduced corporate tax rates to 21%, which I think is going to be a key factor in accelerating the Finance Minister’s promise to reduce tax rates. The ask of industry is to bring it down to 18 percent but frankly, I don’t know if we will achieve 18%, but if we can come down to 25% in Budget 2018, that would be really good.”
Gaurav Karnik further explains, “The Finance Minister has already announced the roadmap for the removal of exemptions and deductions. I am sure they will adhere to the road map and what we have seen is that effective tax rate in India for corporates is typically is between 18% to 23%. and hence the 25 percent rate should be possible.”
So, do bigger companies have lower effective tax rate?
Industry reports suggest that the effective tax rate varies across industries – be it from big to small, sector to sector. For instance, some news reports suggest that capital-intensive sectors reportedly face lower effective tax rates. This raises another concern as to whether such a scenario benefits the larger firms.
Also watch: US Tax Reforms Key Factor In Accelerating FM’s Promise To Reduce Corporate Tax Rates
According to Gaurav Karnik, “This depends on the way the structure is. They could have an effective lower tax because they have may have more exemption, they may be into businesses which have those exemptions and deductions, which thereby lower the tax rate. They could also be into outbound operations, they have assets overseas and they may be paying less tax in those countries and thereby when you look at the overall tax rate of the company, it could be lower because they would be paying much lower tax in places like Singapore, Netherlands or some other countries than what they pay in India. On an overall basis, some of the companies may have lower tax rate but I think that it is very general to say that bigger companies would have a lower effective tax rate. Even small companies could have a much lower rate as well.”
Gaurav Karnik is also of the opinion that there is no need to have a distinction between small companies and big companies as long as there is a simplified code, which is uniform and easy to implement.
MAT rationalisation and removal of dividend distribution tax
Speaking to FE Online on some of the other areas that can be addressed in Budget 2018, Gaurav Karnik stated, ”Reduction on MAT, which is 18.5%, should also come down and there should be some rationalisation around how MAT operates in Budget 2018. The dividend distribution tax is more than 20%, so when you take it along with the corporate tax rate effectively or close to 46% on the total tax which is paid by the company. So, there is an ask that the dividend distribution tax should be removed and this should go back to the old system of a dividend withholding and clearly, that is also something which should help the foreign investors. Today, many countries do not give credit for the dividend distribution tax. If India could move toward dividend withholding a system, we believe that could be another area where the Finance Minister could make some changes this year.”
A closer perusal of other Asian countries brings to the forefront that while China’s corporate tax rate is 25 per cent, the corporate tax rates are considerably lower for countries such as Singapore, Malaysia, Thailand and Hong Kong. To make India more competitive in doing business and considering the global scenario, there is a clear case to fast forward Finance Minister Arun Jaitley’s promise to bring down the corporate tax rate down to 25%