Timid proposals on corporate taxation

There is a case for lowering corporate taxes to make India a competitive destination for foreign investment.

Published - February 02, 2017 04:16 am IST

The Finance Minister’s speech mentions a number of tax concessions for companies. The Minimum Alternate Tax can be carried forward for 15 years instead of 10 years at present. The MSME companies with an annual turnover of up to ₹50 crore will now have to pay lower income tax of 25%.

These are welcome announcements but not bold enough. The FM mentioned that India’s rank as a manufacturing country has improved from ninth to sixth in the world. We have to remember, however, that despite this improvement, in 2015 our share in world exports of manufactures was less than 1.62% against 13.8% for China. Our position as an exporting country of manufacturers is nearer to that of Thailand and Malaysia, which are much smaller economies. Today manufacturing is dominated by international production networks and foreign investors are key players in these networks. India is not attracting foreign investment in manufacturing because of a poor investment environment, and one of the reasons for this is the high rate of corporate taxation.

Foreign investors look for the host countries which allow them to retain maximum profits and the rate of corporate taxation has a crucial role to play in this. While corporate tax rates are 25% in China, 24% in Malaysia and 20% in Thailand, they go up to 34.61% in India in case of companies with income exceeding INR 100 million. For foreign investors, the corpo-rate tax is even higher where the total income is in excess of INR 100 million the foreign investor has to pay 43.26%.

Surely there is a case for lowering corporate taxes to make India a competitive destination for foreign investment particularly in manufacturing. In 2015, the FM had announced that the corporate tax rate would be brought down 25% gradually. This promise has not been followed up in full measure. A reduction of 1% was made effective in 2016 for companies with a turnover of ₹5 crore and it was also announced that new manufacturing companies that do not avail of any exemption would have to pay only 25%. These are partial measures that do not go far particularly because they do no put us on par with other emerging countries named above. Apart from having lower rates of corporate taxes indicated above these countries also have generous tax incentives for new investments. It has been estimated that in 2014-15 the effective tax rate of 29% in India was as much as 11 percentage points higher than of our East Asian competitors.

What compounds the problem of higher corporate tax rates is the unpredictable taxation environment in the country and it does not look like the situation improving in future. The General Anti-Avoidance Rules (GAAR) is now to come into effect on April 1, 2017 and the government has issued a four-page circular as clarification on the provisions of GAAR. The circular is too brief and does not compare favourably with the detailed guidelines issued by Australia, New Zealand or the UK for instance.

In order to ensure that the GAAR is implemented in a predictable manner it is necessary for the government to make the guidelines more elaborate and detailed.

Anwarul Hoda is Professor, ICRIER & ex-member, Planning Commission.

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