Budget 2015: In push for growth, FM to cut corporate tax rate to 25% in 4 yrs

Finance minister Arun Jaitley today bit the bullet by proposing to reduce the basic corporate tax rate by a good 5 percentage points to 25 percent in the next four years and also to remove various exemptions provided to the companies. He, however, said the change in the rate will not start from this year as the idea is to give certainty in tax matters. The reduction in the corporate tax rate will result in a higher level of investment and higher level of growth, he said, amid shouts of protest from the opposition benches. [caption id=“attachment_2127615” align=“alignleft” width=“380”]  The FM noted that though the tax rates are high in the country the effective collection is only 23 percent of the total[/caption] “The corporate tax rate of 30 percent in India is higher than the peer countries. This has made India uncompetitive,” he said in the Budget speech. He noted that though the tax rates are high in the country the effective collection is only 23 percent of the total. The lag in the corporate tax collection is due to the various due to exemptions, which has also given rise to pressure groups and litigations. So, in order to balance the tax rate reduction, the government will also rationalise the corporate tax regime by removing the various exemptions they enjoy. As per data from consultancy KPMG, there are many countries which have higher tax rates than India’s. The US has a rate of 40 percent, Japan has 35.64 percent, Argentina and Zambia have 35 percent and Venezuela and Brazil have 34 percent. But many others, including our peers in the Brics grouping South Africa (28 percent) and China (25 percent), have lower rates. So the argument has been in favour of a lower rate, as this will drive investments in the country. However, it is not clear whether there will be a reduction in the tax rate applicable for foreign companies which pay a 40 percent tax. Apart from the 30 percent basic rate, domestic companies also pay a 10 percent education cess and also a 10 percent surcharge (on the tax). This renders the effective rate at 33.99 percent. In the run up to the budget there was expectation that the FM may cut the cess, surcharge or the minimum alternate tax. The FM has refrained from doing anything too these elements.