26 Dec 2015 15:29 IST

The phasing out roadmap

Centre’s proposal to reduce corporate tax seems to be a move to make India a competitive investment destination

In the Union Budget 2015 speech, Finance Minister Arun Jaitley announced the Centre’s intention to reduce the corporate tax rate from 30 per cent to 25 per cent over a period of four years, which would be accompanied by the removal of tax incentives and deductions. Following this, in November 2015, Central Board of Direct Taxes (CBDT) released the first roadmap of the phasing out plan to simplify tax administration and bring in more transparency.

In today’s competitive economy, a country’s tax structure is an important factor that investors take into consideration, while deciding where to put their money. Acknowledging this characteristic, many countries have moved towards building their tax regime to be more competitive — the ruling government’s proposal of phasing out tax incentives and reducing corporate tax rate seems to be a move along similar lines.

Current scenario

At present, the effective corporate tax rate in India is 34.608 per cent; this makes other emerging economies viz China, Indonesia, Brazil and South Africa, more attractive for investors, where corporate tax rates lie between 15 per cent and 28 per cent, from an income-tax perspective.

Nonetheless, to compensate, the previous governments offered a number of tax incentives in the form of exemptions, weighted deductions, allowances, and other offers to high priority sectors such as pharmaceutical industry, companies engaged in generation and distribution of power, information technology sector and infrastructure.

However, the efficiency of these incentives has always been questioned; it has been marred by huge compliance costs for taxpayers; significant administration costs, efforts for the government, and heavy litigation relating to incentive claims both from the income-tax department and the taxpayers. Further, these incentives have also been misused in many cases.

In short, India is perceived as a high tax cost jurisdiction; the government did not benefit in terms of fiscal revenue due to numerous tax incentives either and ended up losing out on both the counts.

Proposed plan

In the recently released plan, the government has proposed to phase-out the incentives and deductions for both corporate and non-corporate tax payers.

The tax incentives with a sunset date will not be extended and for incentives that have no terminal dates, a sunset date of March 31, 2017 has been proposed. Further, the government is also planning to take away the benefits of weighted deductions with effect from April 1, 2017.

Consequently, in the no-incentive era, corporates which benefited by these incentives would stand to lose; however, they hope to be compensated by the reduced corporate tax rates.