Budget 2019: Experts Want Lower Corporate Tax Rates
DDT: 17.46 % on after tax profits available for dividends distribution (100 – 34.94) resulting in effective tax rate of 11.36%
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The Union budget 2019 would be the first full budget during the second term of the Modi government and would be presented on 5 July 2019. There has been a slowdown in the economy and employment generation. It is expected that budget 2019 would focus on reviving the economic growth by rationalization of corporate tax structure. In India, corporate earnings are taxed at 3 levels:
- Corporate Tax: Corporate tax on profit before tax 34.94% plus
- DDT: 17.46 % on after tax profits available for dividends distribution (100 – 34.94) resulting in effective tax rate of 11.36%
- Tax on shareholders receiving dividend income: 11.96% on dividends distributed to non-corporate resident shareholders
This is one of the steepest tax structures in the world with the overall tax rate on fully distributed corporate earnings being as high as 52.5%.
Corporate Tax Rate Reduction to 25%
The Budget 2015 had announced plans to reduce the corporate tax rate from 30% to 25% in a phased manner by removal of various kinds of tax exemptions and incentives available for corporate tax payers.
Budget 2016 provided with the option of reduced tax rate of 25% for new manufacturing domestic companies (incorporated on or after 1 March 2016) subject to certain conditions. Budget 2018 provided further relief to companies by reducing the tax rate to 25% for FY 2018-19, if the annual turnover was up to Rs. 250 Crores for Financial Year ending 31 March 2017. However, the tax rate has remained unchanged for the other corporate tax payers. Globally corporate tax rates have fallen from an average of 27.5% just 10 years ago to 23.6% today. On the other hand, corporate tax rate in India averaged 35% over last two decades. The recent trend is of reducing corporate tax rates by developed countries and the tax rates are now ranging from 20% -25% (UK – 19%, US – 21%, China – 25%).
It may be an opportune time to reduce corporate tax rate to 25% (plus applicable surcharge and education cess) for all corporate taxpayers, LLPs, sole proprietorships and partnership firms. The reduction in corporate tax rates will boost investment and economic activity as companies have greater investible surplus and improve India’s business global competitiveness.
Consolidation of Surcharge and Cess to 10% of Tax Rates
Presently, there are multiple rates for surcharge on tax depending on the level of income (nil, 7% and 12%) and further a cess of 4% on tax plus surcharge making the tax rates very complex. The consolidation of the surcharge and education cess to about say 10% of the tax could be considered to simplify the tax regime for corporates.
Abolition or Rationalization of Minimum Alternate Tax (MAT) rates
MAT was introduced to bring into tax net "zero tax companies" which inspite of having earned substantial book profits and having paid substantial dividends, did not pay any tax due to various tax concessions and incentives provided under the income tax law. It may be noted that over the period of time, while the concessions and incentives have gradually reduced on one hand, the MAT rates have progressively increased from 7.5% in 2000 to 18.5%.
In order to promote competitiveness and boost manufacturing sector which facilitates job creation, the MAT can be abolished or alternatively, rates should be rationalized and burden of MAT could also be gradually reduced from current level of 18.5% to say 15%. This would also be in consonance with the reduction in the corporate tax rates.
Overhaul of Dividend Distribution Tax (DDT) provisions
Presently, the dividend distribution tax is levied at 20.56% on distribution of profits by domestic companies u/s 115O of Income-tax Act, 1961 (‘IT Act’). The Indian corporate tax rate along with dividend distribution tax is one of the highest rates globally. DDT rate could be reduced to 10% (inclusive of surcharge and education cess) and simultaneously, the grossing up concept for computing DDT u/s 115O should be done away with.
Currently dividend received set off which can be availed by an Indian company is restricted to one level. The issue of dual taxation of dividend paid in case of more than 2 tier structure still exists and it would be reasonable to expect that in case of multi-tier holding structure deduction should be permissible for dividends declared to the extent of dividend income.
The present system of DDT is not a withholding tax on dividends and as a result, non-residents are unable to claim credit for the same in their country of tax residence. The re-characterization of “Dividend Distribution Tax” as “Dividend Withholding Tax (DWT)” for Non-Residents will enable foreign Shareholders to claim credit for such withholding tax under the Tax Treaty in their country of tax residence.
Taxation of dividends at shareholder level (section 115BBDA of IT Act)
At present, resident non-corporate shareholders are taxed on dividends @ 10% (plus surcharge and cess) on dividend income exceeding Rs. 10 lacs. This being 3rd level of taxation on corporate earnings needs to be abolished.
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