New Delhi: India’s corporate tax rate cannot be cut further without backing it up with a strong anti-tax evasion mechanism as developed economies are doing, a senior tax official said in Delhi Tuesday.
According to Akhilesh Ranjan, member (legislation) in Central Board of Direct Taxes (CBDT), the mere fact that countries in the European Union are talking about a reduction in corporate tax rate or the US has lowered the rate to 21% is not sufficient to sway India to make a kneejerk reaction on corporate tax rates. Each country has to decide the rates as per its needs, said Ranjan, who also convener of a task force set up to frame a new direct tax code.
India taxes corporate income at 30% rate but for small businesses—with sales up to ₹250 crore and new manufacturers that do not avail of any tax relief—the rate is 25%.
In terms of the number of corporate tax payers, the largest number fall in the 25% category, but the lion’s share of corporate tax receipts come from larger companies in the 30% bracket.
Policymakers had earlier committed to gradually lowering corporate tax rate for all businesses along with a phased withdrawal of tax exemptions. The effect of removing tax concessions, however, kicks in with a lag as these are given for about 7-10 years. Businesses, however, are keen on corporate tax cut for all entities as is the trend in the US and in many EU countries.
“It is important to consider that a mere tax rate cut cannot happen. It has to be followed by very strong anti-avoidance measures,” said Ranjan, adding that countries in the EU are debating anti-avoidance directives while the US has a base erosion and anti-abuse tax (BEAT).
BEAT, part of the US Tax Cuts and Jobs Act signed into law in 2017, targets Indian multinational companies in the IT sector, which cater to their US clients through American subsidiaries.
Ranjan said that bringing new anti-abuse measures is an area that one has to has to tread carefully given the checks and balances required, the effectiveness of the measures and complexities involved.
“But we do need some very strong anti-avoidance measures. We need to augment the tax base. When we are confident that these measures can yield the desired revenue, that is the point when were can think of any substantial reduction in the tax rate, “ said Ranjan. He was speaking at an international tax conference organized in Delhi by the Confederation of Indian Industries (CII).
India had in recent past introduced rules meant to tackle tax evasion including the General Anti-Avoidance Rules (GAAR) and the Place of Effective Management (POEM) rules. They seek to prevent companies resorting to artificial business structures meant to avoid taxes.