Corporate tax rate to be cut to 28%

In a bid to boost investments and spur growth, finance minister Arun Jaitley is likely to cut the basic corporate tax rate to 28% from the existing 30% in the Union Budget to be unveiled on February 29.

This would be the first phase of the plan announced in the last Budget to reduce corporate tax rate to 25% over the next four years.

"The basic rate of corporate tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive," Jaitley had said while announcing the FY15 Budget.

The proposed reduction will subsequently phase out the tax exemptions given to special economic zones, production of natural and mineral oils, export-import benefits and other tax-free sectors.

For this, the Central Board of Direct Taxes (CBDT) is working on the proposals that will to do away with all corporate tax exemptions by April 1, 2017.

A senior tax official said, "Our focus is to bring in simplified tax laws, introduce measures to bring about transparency and clarity."

"The idea of reducing the rate was to increase cash flows in corporates books that could be deployed for investments and give fillip to the government's Make in India policy. Lower rates rather than exemptions provide a transparent regime, which is the need of the hour," he said.

The government's thinking comes in the wake of over Rs 1 lakh crore locked in tax litigation related to excise, service taxes and similar disputes in various courts across the country. The move to lower corporate taxation would certainly improve government revenues and help tax sleuths focus on improving higher revenues for the government.

"The tax rate per se is not the concern as much as the tax administration. There is a complexity in the tax structure," said Ramesh Vaidyanathan, managing partner of Advaya Legal, a corporate law firm.

But one should take a long-term perspective with such measures, said experts.

"With proposed reduction in corporate tax, companies can reduce the price at which they sell their products. This will increase the consumer spend and, in turn, the demand for goods and services," said a former revenue department official who tracks policy measures.

"When companies have more profit, they will increase their investments by putting manufacturing units/factories which will lead to employment generation, and eventually improve the GDP of country," he said.

Though, this fiscal likely to be remain disappointing with the direct tax collection showing a shortfall of Rs 40,000 crore.

Up to January, the overall tax collection stood at Rs 5.20 lakh crore against the target of Rs 7.97 lakh crore, supposed to be met by March 31.

"The reduction will end various tax exemptions currently enjoyed by the industry; there could be an impact on direct tax collection in the new fiscal as over 70% tax revenues come from corporates taxation." said a senior assessing officer of income-tax department.

In the first 10 months, the corporate tax collected by the Mumbai region was Rs 1.1 lakh crore, up 17% from a year ago. Individual tax collections stood at Rs 50,000 crore. Mumbai contributes 34% of the total tax collection in the country.