Revenue mobilisation alone cannot be the criterion to levy taxes by governments at the Centre and states. Fairness, probity and principle of equity must guide finance ministers in deciding the tax rates.
This principle holds good even today whether it’s direct or indirect tax rates. Finance ministers over the years exercised their discretion to determine the rates applicable to specific product categories and industries. A quick break to such trend was made in 2015-16 budget by finance minister Arun Jaitley that announced a comprehensive phased reduction in corporate tax rates to 25 per cent over four years. This was aimed at making tax incidence more modest and laid the foundation for making Indian products cost competitive.
As a first step, tax incidence on companies with turnover up to Rs 50 crore was limited to 25 per cent. The promise was to bring down the mean corporate tax rate by one per cent each year. Jaitley had earlier experimented with limiting tax levy on companies with turnover up to Rs 5 crore to 29 per cent. As a logical extension, NDA government will do well by sticking to the announced plan for phasing down the corporate tax to 25 per cent.
Finance ministry data points to the fact that about 2.85 lakh companies making profits of less than Rs one crore accounted for 30.26 per cent of total corporate taxes mop up. And, 298 companies that have reported profits of over Rs 500 crore have contributed to 25.90 per cent in corporate taxes.
Jaitley had provided relief to 96 per cent companies by reducing the rate to 25 per cent for those with turnover up to Rs 50 crore. Now, the move forward, vis-à-vis corporate taxes, should be in bringing the mean rates on par with globally competitive economies. But, lowering of tax rates will have to be accompanied by discretionary tax exemptions provided over the years. For instance, tax exemptions provided in areas like infrastructure, units located in special economic zones (SEZs) and backward areas will have to end concomitantly. Similarly, tax deductions allowed for corporates on profits, investments and sector-specific commercial operations will have to go if the tax rates were to be set at 25 per cent for all.
Modest mean rate of corporate taxes will not only expand the tax base but also make investments by domestic and foreign companies attractive. This will partly compensate the revenue losses suffered by centre in the short term. Reduction in corporate tax rates will have to go hand in hand with comparatively lower personal income tax slabs that have not been reduced for several years now.
Barring the super-rich category, tax slabs will have to be modestly lower to bring more and more people under tax ambit. Phasing out all deductions and exemptions, even for individuals, will have to be actively considered.
A panel headed by CBDT member Arbind Modi to recommend on a range of issues relating to direct taxes will have to finally take a call on corporate and personal income tax rates, discretion-based deductions and exemptions enjoyed by several influential industry groups.
There’s every possibility that Jaitley will await Modi panel recommendations to carry forward direct taxes reforms like making simpler procedures, transaction costs lower and minimising the interface between corrupt tax officials, individuals and companies. Several recommendations made in the now defunct direct tax code (DTC) were anyway adopted to ring in some transparency.
Industry lobbies demand for lower corporate tax incidence at pre-budget meetings will have to be seen in the light of deeper tax cuts announced by Donald Trump administration in US last two days. United Kingdom’s progressive reduction in rates to 17 per cent in three years and Singapore’s 17 per cent mean tax rate may also have to be considered by finance minister Arun Jaitley.