Ficci Models Budget On Lower Corporate Tax

The Federation of Indian Chambers of Commerce & Industry, in a paper outlining proposals for a model budget, has demanded reduction in the corporate tax rate for domestic companies to 30 per cent.

The chamber says the rate should be stabilised at 25 per cent in the next two-three years to bring it in line with the rates prevailing in most other countries.

The corporate tax rate for domestic companies was reduced from 40 per cent to 35 per cent in the 1997-98 budget, along with the abolition of the surcharge. Still, the current rate of 35 per cent is higher than that in many other countries. For instance, the corporate tax rate is 16.5 per cent in Hong Kong, 18 per cent in Switzerland and 30 per cent in Argentina and Malaysia, Ficci has pointed out.

 

According to the chamber, revenue collections have gone up whenever the corporate tax rate has been reduced. In spite of the reduction in corporate tax rates by the Finance Act 1997 and the decline in industrial growth this year, the revenue collections during 1997-98 are expected to exceed budget estimates and would certainly be more than the collections in 1996-97. This proves that we have not yet reached an optimal level, says Ficci.

Ficcis paper on a model budget has expressed doubts whether the additional tax on distributed profits would achieve its objective of rewarding companies that invest in future growth.

The Finance Act 1997 inserted a new section 115-O in the Income-Tax Act to provide for additional tax on distributed profits. Under the section, the amount declared, distributed or paid on or after June 1, 1997, by a domestic company as dividends is charged to additional income at a flat rate of 10 per cent. This is in addition to the normal income-tax chargeable at 35 per cent on the income of the company.

While proposing the additional tax, finance minister P Chidambaram had observed: Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of the profits and plough them into fresh investments. I intend to reward companies that invest in future growth.

However, says Ficci, the moot point is that this additional levy would eventually reduce the ploughing capacity because some dividends have necessarily to be distributed.

What is desirable is that the government should either reintroduce the investment allowance or introduce technology allowance or provide accelerated depreciation to motivate corporates to make more investment in plant and machinery for expansion and diversification, says Ficci.What does not seem to have been appreciated is that no prudent corporate would distribute dividends to the shareholders more than what is necessary, especially in the competitive economy, says Ficci, demanding that the term exorbitant be quantified.

The chamber has suggested that additional tax be levied only on that part of the distributed profits which is in excess of the minimum normal level, which could be between 10-15 per cent of the paid-up share capital of the company.