Only way to reduce tax rates, raise compliance
Though his budget is likely to have a huge tax hole—the mid-year review had put this at R1 lakh crore—finance minister Arun Jaitley will be under pressure to give some tax concessions to India Inc, more so since the prime minister’s ambitious Make-in-India programme may also need some help; and there is middle-class India that is weary of high tax rates, particularly the top rate which, at R10 lakh, kicks in far too early. India’s effective corporate tax rates are much higher than those in competing countries of South East Asia, and even those in countries like the US and the UK, all in the 20-22% range. And once you add in the various surcharges it goes even higher. It is not clear how much since, while the FY12 budget talks of an effective rate of 23.6%—and 25.1% including dividend distribution tax—the FY15 document talks of a 22.4% rate, but no numbers are given for profits to examine how the computation is done. The important thing to keep in mind, however, is that availing the effective rate is both time-consuming and complicated, and probably leads to all manner of tax disputes as well.
Which is why it is important that the finance minister announce that, over the next few months, his ministry will review the two Direct Tax Code drafts and come up with a brand-new one which eliminates as many exemptions as possible and uses this to come up with one clean tax rate. If the exercise is done quickly enough, it can be sent to the Parliamentary Standing Committee and, by the time the next budget is presented, a new DTC can be in place. Since the finance minister is not going to be in a position to give too many tax sops on February 28, more so given the Finance Commission will also be asking him to share more with states, a time-bound DTC implementation will do a lot to buoy investor sentiments.