Tuesday, December 25, 2007

Can we bring down corporate tax to 26%?

The recent buoyancy in the tax revenue collection has eased, if not obliterated, the pressure on North Block to meet the annual fiscal targets. It has obviously enhanced expectations of the industry with respect to tax cuts.

However, a close look at the corporate tax structure suggests a long-term agenda to achieve ambitious targets set out for GDP growth. The current rate of income-tax for Indian companies is 30% (33.99%, including surcharge and cess); whereas a foreign company is subject to higher rate of 40% (42.23%, including surcharge and cess). Further, the arbitrage is more than offset due to imposition of dividend distribution tax of 16.995%.

An apple-to-apple comparison would reveal that the effective tax rate for a domestic company is relatively higher. Plain maths, besides other factors, explains the rationale for a relook at the tax structure.

Admittedly, the current tax rates may not look as obscenely high as, perhaps a decade ago to suspect tax evasion. But the question is whether it discourages corporate taxpayers from joining the compliance bandwagon, especially in view of fast fading tax exemptions.

Stepping back a few years, to cope with the menace of tax evasion and non-compliance, the finance minister in 2005 slashed corporate tax rates from 35% to 30%, driven primarily by the recommendation of the Kelkar taskforce.
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