Corporation tax: FY17 might see 1-1.5% cut

Will go together with withdrawal or reduction in present benefits, in a phased manner, and depending on fiscal buffer available

The government is likely to approve a marginal reduction in the corporation tax rate of up to 1.5 percentage points in the Union Budget for 2016-17, while simultaneously setting a sunset date for most open-ended tax benefit schemes for business.

In line with the Budget announcement of reducing the corporation tax by five percentage points to 25 per cent in four years, the government is working on a list of corporation tax incentives in the form of deductions and exemptions to be eased out. "Only a marginal reduction of 1-1.5 percentage points is being considered for the first financial year (2016-17). On phasing out of corporation tax exemptions, the objective is to make it as painless for industry as possible," said a government official.

Corporation tax, though 30 per cent, is effectively 23 per cent, due to many exemptions and deductions. The revenue forgone in 2012-13 on this account was Rs 68,000 crore. In the next financial year, the rate might be 29 per cent or 28.5 per cent. With this, the government is looking at initiating the process of aligning Indian taxation levels with global standards.

"Each and every deduction need not necessarily be done away with. Whether exemptions or deductions go completely or substantially, is a call yet to be taken," said the official.

The ministry would shortly bring out a discussion paper on this and announce a schedule in the next Budget.

As of now, 38 corporation tax deductions are available. For instance, benefits for units set up in special economic zones, northeastern states, in Uttarakhand or Himachal Pradesh. Besides, tax incentives are offered for expenditure on scientific research, funding to charitable trusts and institutions and contribution to political parties. Deductions are offered to power, telecom and infrastructure sectors.

Corporation tax deductions that already have an end-date, called a sunset clause, will be automatically phased out as the government will not give further extension. For clauses without an end-date, the government will put in place a sunset date. This will give time to the sector to adapt.

For instance, the investment allowance benefit of a 15 per cent deduction for a manufacturing company that invests more than Rs 25 crore in plant and machinery, announced in the current year's Budget for a three-year period, will not be extended beyond the sunset date.

"We will not change rules for those who have just started claiming benefits or disrupt plans of those who just started out with a promise that they will get deductions for 10 years. So, if someone started in, say, 2012, we cannot say that tomorrow you would not get these benefits. The exemptions will basically be eased out," said the official.

Sudhir Kapadia, national tax leader, EY, said the withdrawal and reduction in these deductions would simplify many things.

The ministry is likely to strike a balance between shrinking of the corporation tax rate and withdrawal of tax benefits to ensure steady revenue collections. As a large part of the tax benefit phaseout will begin taking effect only in the next two to three years, and extend up to 10 years in most cases due to their sunset dates, the government is likely to rear-load the corporation tax rate cut towards 2018-19.

However, all this also depends on the fiscal space available with the government. "If oil prices keep low, tax collections robust and the economy buoyant, there might be a chance of faster reduction in the corporation tax rate. There will also be a link between phaseout of benefits and reduction in the rate," said Rahul Garg, leader, direct tax, PwC.