DTC panel suggestion on corporation tax different from FM's formula

The corporation tax rate structure recommended by the task force on direct tax laws was a bit different from what was announced by Finance Minister Nirmala Sitharaman last week.

The panel, headed by central board of direct taxes (CBDT) member Akhilesh Ranjan, also recommended 25 per cent corporation tax rate for companies, but without surcharges and cess, sources said.

Sitharaman on Friday had announced 22 per cent rate for companies. Adding surcharges and cess, this becomes 25.17 per cent against the current rate of 34.94 per cent.

Sources said the panel recommended doing away with cess and surcharges to make corporation taxes a clean structure.

Besides, the panel wanted 25 per cent corporation tax rates for all, sources said. On the other hand, the finance minister had announced it for companies not availing exemptions such as tax holidays enjoyed by units in special economic zones (SEZ) or accelerated depreciation.

The panel wanted that the exemptions may continue till they are phased out, according to the existing road map.

Illustration: Ajay Mohanty

According to the new structure, those not availing of the reduced rate due to exemptions they enjoy, can opt for the reduced rate once the sunset clauses on the exemptions end.

The Friday ordinance also talked about reduced rate of 15 per cent for those companies that would be incorporated from the next month and start production before March 31, 2023. These companies are not required to pay minimum alternate tax (MAT).

The original task force on direct tax laws, constituted by the Modi government, had proposed a 15 per cent corporation tax rate across the board.

That panel, headed by former CBDT member Arbind Modi, had proposed that this reduced rate be complemented with changes in accounting procedures, and modification in the rule for source of income.

Not all members of the Modi panel signed on the recommendations because of which the new task force under Ranjan was appointed.

Some people say the corporation tax rate cut will only address supply side issues, whereas the problem was demand side slowdown. They wanted that the overall report of the task force be reviewed and implemented, including its recommendations on personal income tax rates.

“Instead of piecemeal implementation, the government should implement the DTC report as a whole, which addresses all issues, while also ensuring that revenues are protected,” said an expert.

The new corporation tax rates cut would hit the exchequer by Rs 1.45 trillion a year.

The expert added that a cut in personal income tax would have addressed the demand side problem too, by giving more income in the hands of the people.

The Friday's move would make India competitive at the global level. While total tax rate on new companies manufacturing in India now stands at 17.01 per cent and 25.17 for others, it is 21 per cent in the US, which earlier had 35 per cent corporation tax. Among competitive economies, Vietnam, which is getting the most benefits out of US-China war, has 20 per cent tax rate. Among other countries, Indonesia has 25 per cent, Thailand 20 per cent. Singapore has tax rate almost equal to that of new companies in India at 17 per cent, while Hong Kong has lower tax rate at 16.5 per cent.

In a fix?
 

• Panel on direct tax laws recommends 25%  corporation tax rate, doing away with cess and surcharges
• This is slightly different from new corporation tax rate structure
• New structure says 22% corporation tax rate, which comes to 25.17% after cess and surcharges
• The panel also wants 25% tax for all companies
• The new structure is for only those companies not enjoying tax exemptions