New Delhi: Every cloud has a silver lining and the pain of demonetisation may get addressed after all. It seems the government is working towards a host of direct tax incentives, to be announced in the upcoming Union Budget, buoyed by increased tax collections due to demonetisation. This could mean lower personal income tax rates and lower corporate tax rates too. This piece quotes policy experts and people involved in the budget making process to indicate that the twin sops could be on their way.
The only catch in the feel good news is this: will there be a toss-up between the personal income tax rates and corporate tax rates for a government which is still uncertain about the revenue mop-up this fiscal (demonetsiation and its impact is still being assessed). And will hectic lobbying by India Inc tilt the scales in favour of reduction in corporate tax rates?
Corporate tax accounted for a little less than a fifth (19 percent) of the government’s receipts last fiscal whereas income tax receipts accounted for just 14 percent of total receipts. Together, these two tax heads accounted for a third of government’s revenues. According to this piece of the total tax — Rs 16,30,888 crore — collected by the central government last fiscal, corporate tax has the major share, though it has declined from 39 percent in 2009-10 to estimated 30.2 percent in 2016-17.
Some taxation experts have expressed doubts about any move to lower personal IT rates. One expert, who declined to be named, said that lowering income tax rates would go against the pro-poor image which the Modi government is quite keen to project, since this would mean relief to the “rich” but not for the “poor”. This expert said all the talk about personal income tax rates being reduced is just that – talk – when the government may actually be focused on only reducing corporate taxes instead since this will provide tangible benefits. Besides, industry has been assuring the government that if the headline rate becomes the effective tax rate in this case, overall tax revenue will actually get a boost if corporate tax is lowered. It stands at 30 percent now except for businesses with a turnover of less than Rs 5 crore where it was relaxed in the last budget.
Girish Vanvari , Partner and Head of Tax at KPMG, pointed out that the government needs to focus on lowering corporate taxes to boost job creation. “Personal income tax rates are unlikely to be lowered because reduction in corporate taxes will lead to job creation and there may be no further room for lowering personal taxes”.
Well, if personal income tax rates do come down, there would be all-round cheer. EY’s Tax Partner & Mobility Leader Amarpal Chadha said personal income tax rates could be eased in the budget. “Expectation (from the Budget) is for the Government to reduce the personal income tax rates or enhance the tax slabs, probably as an incentive, given that Income Disclosure Scheme has resulted in additional revenue and the impact of demonetisation may bring in more taxpayers. One has to wait and watch as this year’s budget discussions progress.” Remember, the initial proposal under the Direct Tax Code was to only tax income of 25 lakh and above at the rate of 30 percent.
The Business Standard piece quotes Neeru Ahuja, partner global business tax, Deloitte as saying that “I am expecting something positive on the tax front in the budget to compensate people for the hurt caused by demonetisation. ….the government may increase some tax slabs to compensate people or come out with some incentives to save taxes. It might do to couple that with stricter and stringent enforcement provisions for non-compliance”.
But let us get back to corporate tax. That corporate tax reduction is very much a talking point this year is clear: it is at the top of India Inc’s wishlist. According to a CII pre-budget memorandum, the effective corporate tax rate is just 19.8 percent now (much lower than the headline rate, thanks to myriad exemptions). And India Inc wants it lowered to 18%, including all surcharges and cess, and has asked the government to withdraw all tax incentives, concessions etc.
“We believe that in the past when corporate tax has been lowered, corporate tax collection has gone up. An 18 percent corporate tax should therefore not lead to revenue loss to the government and at a stroke move us away from a high tax, high concession regime. This will bring India in line with the most attractive international investment destinations such as Singapore, Sri Lanka, UK and Turkey,” CII said.
On personal income tax, CII has recommended that basic limit for exemption and other income slabs should be enhanced. IT has quoted The Parliamentary Standing Committee on Finance’s Report on the Direct Taxes Code Bill 2010 (DTC Bill) and its recommendations on revised tax slabs for individual taxpayers. The chamber has suggested that the highest tax rate should be reduced to 25 percent against 30 percent now.
Assocham has sought “immediate” reduction in the corporate tax to 25 percent to attract more investment in the country. “While for driving the consumption led demand, income tax for individuals should also be reduced along with upward revision in the exemption limit upto Rs 5 lakh”.
The tax expert quoted earlier on had pointed out that tangible benefits would accrue to the economy by reduction in corporate taxes – not personal income tax rates. He said this single move would mean job creation and incentivising the manufacturing sector so that the overall economic growth is enhanced. “What will lowering personal income tax achieve except conveying the message that the rich will have it easy….already, GST has strengthened the perception that tax inequality will increase since this tax will be equal for the rich and the poor…..income tax rates won’t be tinkered with this time,” he said.
As the budget making process gets underway, let us hope that the government is able to please both – the suits as well as the aam aadmi – specially after the flak it has been receiving for the demonetisation pain.
For full coverage of Union Budget 2017 click here.
Updated Date: Jan 13, 2017 20:25 PM