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Cut in basic corporate tax but exemption list to be pruned

Jaitley said that the effective collection of corporate tax was about 23 per cent.

Written by Anil Sasi | New Delhi |
March 1, 2015 3:19:43 am

The Union Budget has held out the promise of a cut in the basic corporate tax rate, from the current 30 per cent to 25 per cent over the next four years, accompanied by a pruning of exemptions currently enjoyed by the sector. While industry has broadly cheered the cut in basic rate, for a majority of firms in the manufacturing sector, the proposed cuts in exemptions could mean an increase in overall tax impact, considering that effective tax rate of the manufacturing sector this fiscal is estimated to be at 21.96 per cent and and 24.37 per cent for the service sector — well below the average statutory rate.

In his Budget speech, Finance Minister Arun Jaitley said high corporate tax with too many exemptions had led to a situation in which the government neither got revenues nor investments. “The basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive,” he said. Jaitley added that the effective collection of corporate tax was about 23 per cent.

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“A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I therefore propose to reduce the rate of corporate tax from 30 per cent to 25 per cent over the next four years. This will lead to higher level of investment, higher growth and more jobs,” the finance minister said. This process of reduction in the basic rate, he said, has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemption and incentives for corporate taxpayers, who incidentally account for a large number of tax disputes. “I wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away but I thought it would be appropriate to give advance notice that these changes will start from the next financial year,” Jaitley said.

The move to prune exemptions comes at a time when taxes of about Rs 1 lakh crore are estimated to be locked up in various stages of litigation in service tax and central excise at the end of March 2013, according to the CAG’s July 2014 report. The CAG noted that Rs 62,543 crore was pending at the end of March 2011, Rs 70,572 crore at the end of March 2012 and Rs 1,02,581 crore at the end of March 2013.

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