Wednesday, February 13, 2008

Corporate Tax Expectations from the Forthcoming Indian Budget

by Phillip Horton

Expectations are running high of corporate India from the forthcoming budget which will be presented by the Indian finance minister by the end of February. In the year that concluded the Indian economy witnessed considerable growth and reports have proved this fact. The Organization for Economic Cooperation and Development or the OECD conducted its first survey in this regard which was released in October of 2007. This report by the OECD states that if the reforms are kept in place the set GDP growth target of the Indian government can be achieved, and the government plans a ten percent GDP growth by the year 2011. The survey by the OECD also outlined that when it comes to real prices and the purchasing power the Indian economy stands as the third biggest economy in the world immediately after the United States and China. The collections of direct taxes currently are the highest and the expected graph of the growth of Indian economy will surely be higher. In order to continue this growth of the economy the Indian government should give a thought to implement tax reforms.

There should be a decrease in the tax rate and the tax base widened. Competitive tax rates would allow a level playing field in the world for corporate and this way India will also be able to have international capital flowing in the country. Given this encouraging situation the Indian government must think of reducing the effective corporate tax rates in its forthcoming budget. The government however had reduced the tax rates from 35% to 30% which was for the domestic corporates and it still is a superficial corporate tax rate. The reason being the addition of surcharge which takes the total corporate tax percentage to almost 33.99% which means that there is no real reduction in the corporate tax. Further the reduction is no reduction because there is the additional distribution tax on dividends which stands at 16.995% and this takes the tax rate at 40%. The FBT or the Levy of fringe benefit tax increases the effective rate still higher.

Given this scenario of the corporate tax the case of reducing the corporate tax in India becomes even stronger. The government thus should try to bring down the corporate tax to 30% by restructuring through ways of FBT, cess or the surcharge. The surcharge can be removed since it was meant to be a temporary step and the government likewise can out rightly remove or at least reduce the Dividend Distribution Tax and Minimum Alternate Tax. Corporate taxes in countries like China, Brazil, and Russia are much lower as compared with the taxes in India. A reasonable tax level has to be there since it helps in the industrial and economic growth and it also encourages compliance by the tax players and the tax base also widens. One way to bring more tax payers in the net is to tax those corporates that deal with profitable agriculture activities but not at the cost of individual farmers.

 

 

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