Journalism of Courage
Anticipating that there will be no regular Budget before the General Elections,the UPA II government expects to dangle tax breaks to the public and companies in the forthcoming Winter Session of Parliament itself.
A top finance ministry official said the big change will be a lower corporate tax rate instead of the current maximum 33.99 per cent rate by doing away with all surcharges. It could also provide for a re-examination of all cess including that on education.
This will be done through the Direct Taxes Code (DTC) to be tabled in the Lok Sabha by finance minister P Chidambaram.
The effective tax rate for companies should be as close as possible to the minimum alternate tax of 18.5 per cent of book profit which is what several big companies pay, the official said. Else,the incentive to play around with exemptions will not go away, he said.
The changes will be effected from FY15 but the finance ministry estimates the positive effect of the announcements will create a favourable impact on Corporate India. It will be read as a clear indication of the direction the present Congress-led government would follow if it is re-elected.
Simultaneously,the DTC is unlikely to offer any tax breaks for contributions made by companies for spending 2 to 3 per cent of their profit towards corporate social responsibility (CSR).
The official said since the new Companies Act has not made spending on this head compulsory,there is no reason to offer any tax break now. It would instead wait for data on the CSR spends to accumulate for more than a year,before taking a call.
While some changes are also expected to be made in the personal income tax rates,the official said those are unlikely to be major at this stage.
A lower corporate tax rate has been debated for some time within and outside the government.
A KPMG analysis for instance shows,the Indian rates are fairly above the global norms. The OECD average is 25.32 per cent,while the EU average is even lower at 22.85 per cent. While US is comparable with India,most companies there manage to avail of the 20 per cent at alternative minimum rate.
In India with a large swathe of companies using the minimum alternate tax route,the higher corporation tax rate becomes counter productive,it is argued.
A finance ministry study released with the Budget papers show the effective tax rate of tax paying companies for the corporate sector was 22.85 per cent in FY12 which has gone down from the rate of 24.10 per cent reported in FY 11.
The DTC is the largest ever rewrite of the tax laws in the country to replace the Income Tax Act of 1961 with a fiscal structure in sync with the demands of tax rules for the current era. Work on the DTC began in 2009 in the earlier term of Chidambaram and one version of it also came up in Parliament in 2010.
Investors,domestic and foreign have underlined the need for the government to get the DTC passed through Parliament before it goes to the polls. The government too,in its turn has assured that it will bring the bill in the legislature in the Winter Session.
