Letters: Calibrating exemptions

In the article, "More to it than meets the eye" (December 10), A K Bhattacharya has discussed the impact on revenue the finance minister's suggestion of reducing the corporation tax rate from the present 30 per cent to 25 per cent and withdrawing all the exemptions at the same time would have.

The subtitle of the article reads, "The government's plan to cut the corporation tax rate while phasing out exemptions may be sound, but it may not mean a reduced tax burden for India Inc." I have some reservations about this observation. India Inc cannot be taken as one entity; it has to be divided into three in the context of exemptions: (i) Those paying 30 per cent tax without availing of any exemptions; (ii) Those paying 25 per cent tax after availing of exemptions; (iii) Those paying less than 25 per cent tax after availing of exemptions.

The first and second categories account for 80 to 90 per cent of India Inc and the third category, the rest. If the corporation tax rate is cut from 30 per cent to 25 per cent, those who will benefit from the move will far outnumber those who will have to shell out more. But the impact of this measure on the economy will depend on the nature of the exemptions abolished.

Export-oriented exemptions can be abolished for direct taxes but not so for indirect taxes because that is for zero-rating of exports. The total tax collection will be the same, as is the intention of the government. So phasing out of exemptions will have to be calibrated, as has been observed in the article.

My conclusion is that while overall liability of tax will not be reduced by five percentage points, the differential impact of the lower tax rate itself will be welcome and even be celebrated by a majority of companies. The very idea of a lower tax regime will make India more investment-friendly for foreign direct investors.

Sukumar Mukhopadhyay, New Delhi

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