Low profit-high tax anomaly to go

Proposed reduction in corporate taxes to ensure equity in levies

Low-profit companies will benefit from the proposed reduction in corporate tax from 30 per cent to 25 per cent in the Union Budget 2015-16. Under the proposed changes, the rate of corporate tax applicable to big-profit companies will go up. The fine print of the budget shows that smaller-profit companies end up paying corporate tax at higher rates than the big-profit companies — an anomaly that could begin to get corrected from the coming financial year beginning April 1.

Union Finance Minister Arun Jaitley’s Budget proposal on lowering the corporate tax rate over the next four years along with a phased elimination of exemptions, that reduce the effective rate to about 23 per cent, is expected to correct this inconsistency and also make the levy more equitable.

While companies with profits of less than Rs.1 crore last financial year paid tax at the effective rate of 26.89 per cent, those with profits in excess of Rs.500 crore paid it at a lower rate of 20.68 per cent, shows an analysis of the electronically filed corporate returns, provided in the Budget documents.

'Changes in corporate tax regime to reduce disputes'

The proposal to correct the corporate tax regime by lowering the tax rate and removing the exemptions will lead to higher level of investment, higher growth and more jobs, Union Finance Minister Arun Jaitley said in his Budget speech in Parliament on Saturday. The proposed changes, he said, would come into effect from the next financial year.

“We lose out on both counts, i.e. we are considered as having a high corporate tax regime but we do not get that tax due to excessive exemptions,” Mr. Jaitley said.

At 30 per cent the basic rate of corporate tax in India is higher, he argued, than the rates prevalent in the other major Asian economies, making the domestic industry uncompetitive. Still, the effective collection is just about 23 per cent, the Finance Minister said.

Further, the regime of exemptions has led to pressure groups, litigation and loss of revenue and it also gives room for avoidable discretion, he said. “This process of reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes.”

In the Budget, the Finance Ministry has estimates that the revenue collected under corporate tax will go up marginally during 2015-16 to Rs. 4,70,628 crore against Rs. 4,26,079 crore during the current year.