Lowering of Corporate Tax: A major reform to bring parity with international tax laws

Lowering of Corporate Tax: A major reform to bring parity with international tax laws

 

Everyone seems to have been taken by surprise by the government’s plans to reduce corporate tax breaks. It expects a cut in tax rates, too.

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India has unveiled the details of an ambitious reform plan to rid its income tax law of exemptions and lower the corporate tax rate to 25% from 30% now, bringing it closer to international levels.

 

The government on Friday announced its roadmap towards phasing out corporate tax exemptions, a commitment made by Finance Minister Arun Jaitley in his Budget speech. According to the proposal from the Central Board of Direct Taxes (CBDT), sunset clauses with regards to tax exemptions will be renewed and no weighted deduction will be allowed for any specified business activity from April 1, 2017, onwards.

 

In a statement on Friday, the tax department said the exemptions are being phased out on the basis of four major principles. Profit-linked, investment-linked and area-based tax deductions will be phased out for both corporate and non-corporate tax payers.

 

The provisions having a sunset date will not be modified to advance the sunset date. Similarly, the sunset dates provided in the Act will not be extended.

 

“In case of tax incentives with no terminal date, a sunset date of March 31, 2017 will be provided either for commencement of the activity or for claim of benefit depending upon the structure of the relevant provisions of the (Income Tax) Act,” the CBDT has proposed.

 

At present, India gives tax holidays to various sectors including power generation, distribution and transmission, special economic zones and telecom. Tax holidays are also given for setting up manufacturing units in the North-East and some special category states like Jammu and Kashmir and Himachal Pradesh. All these will be phased out.

 

Further, CBDT proposed that “profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate tax payers”. The CBDT has invited comments on the proposal within 15 days.

 

Reducing the corporate tax rate and bringing a systematic approach to taxation in general is viewed as one of the way India can improve its Ease of Doing Business Score.

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