Government to bring down corporate income tax rate to 25%; eliminating concessions

Government has brought out a road map to end the jungle of tax concessions and deductions in corporate income tax (CIT). At the end of the exercise, the corporate income tax rate will be set at 25% compared to the present 30% for domestic companies. Finance Minister has announced the reduction proposal in the last budget.

Usually, tax concessions and deductions are allowed for major central government taxes to encourage investment, R&D and to realize several other objectives. But in recent years, government is aggressive on revenue mobilization like many foreign governments. Governments’ complaint is that such concessions caused steep tax revenue loss. Companies and individuals are avoiding taxes by utilizing such incentives.

In India, the aggregate tax rate for domestic companies is 34.61 per cent including the basic rate of 30% and cess and surcharges. But on an average the effective rate is 23% as companies avail large number of concessions and deductions. Government hope that removing these concessions and setting the tax rate at 25% will help the government to realize higher tax revenues. Similarly, it may improve perception of India by setting a lower tax rate.

As per the indications of the Ministry of Finance, depreciation allowance, the item that caused the highest tax revenue loss will be reduced. According to the tax revenue loss statement which is introduced as part of the budget 2015, the depreciation allowance has cost the government Rs 42226 crore in 2013-14. Total tax revenue loss for the year from CIT was Rs 76116 crore for the year. Deduction allowed for SEZs accounted for the second revenue loss.

Corporate tax rate in various countries

Source: KPMG

India’s tax rate is not the highest in the world though it comes on slightly higher side. Most India’s peer countries especially the EMEs are a having tax rate between 25 to 30 per cent.