Corporate Tax Rate To Be Cut, Surcharge To Go

The government is set to withdraw the surcharge on corporate income tax in the Union budget, to be presented on February 28, officials said and added that the overall corporate tax rate may also be reduced.

The officials said that the surcharge was practically certain to go and that it was possible that the corporate tax rate would also be cut from 40 per cent to 35 per cent.

Incidentally, while presenting his first budget last year, finance minister P Chidambaram had expressed hopes of being able to do away with the surcharge in his next budget.

The surcharge had been introduced in 1990 by Manmohan Singh, who was the finance minister then, to deal with the surge in the world oil prices on account of the Gulf War.

 

In 1994-95, Singh eliminated the distinction between the widely- and closely-held companies and unified the corporate tax rate at 40 per cent and continued with the surcharge on the plea of revenue constraints.

In the 1993-94 budget, Singh had held out the hope that he would be able to discontinue the surcharge after one more year, which was belied.

Last year, Chidambaram slashed the surcharge from 15 per cent to 7.5 per cent in the budget.

Domestic companies at present are liable to pay income tax at the rate of 40 per cent and those with an annual income of Rs 75,000 also have to pay a surcharge of 7.5 per cent on the income tax payable by them. The effective rate, thus, works out to 43 per cent.

Therefore, Chidambarams gesture had only a marginal effect: it reduced the tax burden by merely three per cent. This spurred a demand for abolition of the surcharge.

The government, however, pointed out that the effective tax rate on companies worked out to only 19.5 per cent on account of exemptions.

The total collection on account of the surcharge in the revised estimates for 1995-96 was Rs 2,044 crore.

The budget estimate for 1995-96 was lower at Rs 357 crore.

The budget estimate for 1996-97, despite the reduction, had been put at Rs 2,351 crore.

In a pre-budget memorandum, the Confederation of Indian Industry (CII) had suggested a reduction in the corporate tax rate to 35 per cent.

According to CII senior director Manashi Roy, this would release funds for industry to plough back and would also be on a par with international tax rates. A reduction in the corporate tax rate, in fact, had led to a larger revenue collection in the past on account of better compliance.

The tax rates in Brazil, Indonesia, the United Kingdom and Hong Kong range between 15 and 25 per cent, in Japan, USA, Australia and Canada between 25 and 35 per cent and between 36 and 40 per cent in Belgium, Italy and Poland.