Budget 2016: Simplified corp tax FY17-FY20 to improve competitiveness

MoneyControl

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Standard Chartered expects the FY17 Budget to include a roadmap on corporate tax reduction and exemption rationalisation. India’s finance minister Arun Jaitley in his 2015 Budget speech announced the government’s intention to rationalise exemptions and reduce the corporate tax rate to 25 percent from 30 percent in FY17-FY20. 

The tax department published a draft proposal on this in November 2015. A concrete roadmap, with a defined timeline, will be announced in the 29 February 2016 Budget speech. Such a reform is necessary as the current tax framework is complicated.

India is perceived to be a high tax levying country. The basic corporate tax rate is 30 percent, but the government’s realised tax rates are much lower at c.23 percent. because of a range of exemptions. These exemptions and incentives, besides complicating the tax structure, favour larger, profitable companies. The current structure has also led to multiple litigations, worth over INR 5tn (USD 80bn) as of September 2014, resulting in high tax administration costs.

Standard Chartered also said, Government needs to strike a balance between simplifying the tax structure and phasing out exemptions, so as to have a minimal adverse impact on investment. If industry perceives the rationalisation of incentives/exemptions as another headwind to investment/exports, it could negatively affect sentiment in the near term.