Why the government is reducing Corporate Income Tax Rate?

Corporate income tax (CIT) is the largest tax revenue of the central government. The tax has recorded good growth rate over the last two decades. Another notable feature of CIT is its high tax buoyancy. This means that there will be high growth rate of tax when the economic grow rate is high. The CIT became the largest tax revenue from 2007-08 onwards. Now the government is reducing the corporate income tax rate from 30% to 25% over a four-year period starting from 2015.

Why the government is planning to reduce Corporate Income Tax?

Finance Minister in his 2015 budget indicated that government is planning to reduce Corporate Income Tax rate to 25% gradually. Government’s objective is to make corporate income tax rate equal to that of the ASEAN region. At present, the rate is 34.61% cumulatively with a basic rate of 30% (domestic companies). But the effective collection of corporate tax is about 23% because of the incentives.

 According to the Finance Minister such a move will increase the tax revenue for the government because of the following factors.

1. At present there is large number of exemptions (like to make R&D, SEZ presence) and deductions (depreciation) allowed for corporate. This makes tax administration difficult as well as it makes the corporate to exploit with deliberatively created avoidance practices. Under the new format, there will no scope for any exemptions and deductions. The reform in CIT is to eliminate such complexities by bringing the tax rate to 25% in four years.

2. A tax rate of 25% may attract more investment as it is a lower rate and such a system will give more certainty about tax burden to the business people.

3. A lower tax rate will reduce tax avoidance practices by the corporate. Now, as the rate is relatively high at 34.61%, companies are inventing mechanisms to avoid taxes. If tax rates are brought down, revenues may increase, because of increased tax compliance.

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