Finance Minister Arun Jaitley on Thursday proposed to cut the corporate income tax rate to 25 percent for companies with a turnover of up to Rs 250 crore, meeting a key demand of the corporate world that has been seeking lower tax payouts to enable greater investment and jobs creation.
In Budget 2015-16, Jaitley had laid a roadmap to bring down corporate tax rate to 25 percent, which is yet to be implemented.
This will benefit 99 percent of all companies that file taxes, Jaitley said, adding that mini, micro, small and medium enterprises will gain the most.
Major industry bodies had been urging the government to reduce the corporate tax rate, in sync with what was announced three years ago.
The move to cut the corporate income tax rate to 25 percent for companies with the turnover of up to Rs 250 crore could well signal the beginning of reforming one of India’s complex tax systems that are mired in layers of exemptions and sops over the years, making it difficult to administer.
In November 2015 the government had laid down a comprehensive roadmap for phasing out the corporate tax exemptions by 2018 as it looks to reduce the tax rate, simplify administration and improve India’s competitive edge globally.
In September, Prime Minister Narendra Modi had said that more than half a century old Income-Tax Act needs to be re-drafted and a new Direct Tax Code (DTC) needs to be introduced in ‘consonance with economic needs of the country’.
The finance ministry in November constituted a six-member task force suggest redrafting of India’s income tax law and rules. Arbind Modi, Member (legislation) of Central Board of Direct Taxes (CBDT) is the convenor. Chief Economic Adviser (CEA) Arvind Subramanian is a permanent special invitee in the task force.
While the report needs to be submitted to the government by May, 2018, the decision to cut the corporate income tax rate for a large number of companies could be the precursor of more comprehensive direct tax reforms.
The task force will draft a direct tax legislation keeping in mind, tax system prevalent in various countries, international best practices, economic needs of the country, among others.
Tax deductions and exceptions have been prone to misuse and consequential litigation. It is speculated that the government may pay down a roadmap to wind down these exemptions. The government may not allow the so-called sunset date to be advanced. This effectively implies that existing tax exemptions will run their course, but the government may not extend these any further.