Recent tax reforms in the United States have slightly lowered individual tax rates and adjusted income brackets. The new brackets proposed are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As per the new reforms, the top individual tax bracket would be reduced to 37% from the current 39.6%. “Under the current US tax laws, an individual taxpayer was allowed a standard deduction of $6,350, plus personal exemption of $4,050. Under the new proposals, this would be combined into one larger standard deduction of $12,000 for single filers and $24,000 for joint filers,” says Chetan Chandak, Head of Tax Research, H&R Block India.
This will put some additional disposable income in the hands of individual taxpayers and also simplify the tax laws to a certain extent, which will for sure help boost the overall economy.
Beyond this, the Trump government has also proposed certain big-ticket reforms in corporate and business tax, which primarily include
1. Reducing the existing corporate tax rates from 35 per cent to 20 per cent;
2. No Tax On Overseas Profits, where profits earned by overseas entities from overseas operations will not be taxed in the US;
3. Imposing a deemed profit repatriation tax as per which profits retained overseas will be taxed at a concessional tax rate of 7% to 14.5%. This will boost substantial movement of capital from overseas entities to the US entity; and
4. Anti Abuse Tax On Overseas Payments, where this proposal will impose a tax on payments made by the US companies to their overseas affiliates either under Excise Tax or Base Erosion and Anti Abuse Tax.
“Overall these corporate tax reforms are aimed at reducing the tax rates for the entities operating and reporting their income in the US, making it less motivating and tough to shift or retain profit outside the US. This will leave US corporates with higher post-tax earning which they can further reinvest to boost the overall economy. It will also help in the creation of new employment opportunities in the US,” informs Chandak.
What can India learn from the US tax reforms?
India has a lot to learn from these US tax reforms. For instance, the government should seriously think about reducing the personal tax rates which will help in widening the taxpayers base with increased compliance.
It can also merge various deductions and exemptions under the existing tax laws into a single standard deduction, which will help in simplifying the tax laws for a common man.
“The Indian government should also reduce the corporate tax rates as proposed by the US. This will help the Indian entities to survive in global competition and also help them in driving the growth in India. It can also provide some incentives to the Indian MNCs which are earning globally so that there is less motivation left for them to hoard their profits or investments outside India,” says Chandak.