Road Map to Lower Corporate Tax

It has been decided by the finance ministry to sequence the withdrawal of exemptions and the
reduction in corporate tax rates in such a way that the whole exercise is revenue neutral.
In 2015-16 Budgets, Finance Minister Arun Jaitley had unveiled the government's intention to reduce
corporation tax rates from 30% to 25% over a four-year period, while also pruning exemptions.
Due to the exemptions, the effective rate is around 23% but the 30% rate conveys that taxes are higher
in India than in several economies that it competes with for attracting investment. The move is
expected to reduce the tax burden on companies and stop them from shifting out of India. Several
firms have shifted to other cities due to the favourable tax structure and rates.
Special economic zones and units in such areas, infrastructure facilities, and commercial production
of natural gas and mineral oil having no end date for commencement of operations, will sunset on 31 st
March, 2017, as per the plan. Weighted deduction from taxable income for specified sectors including
affordable housing, cold chains, and warehousing and gas pipelines will also be off from April 1,
2017. The highest rate of depreciation is proposed to be cut to 60% from 100%.
The government is estimated to have foregone Rs 62,400 crore in corporate taxes on account of
various incentives in the year 14-15, up from Rs 57,800 crore a year earlier. "This is a step towards
simplification of tax laws, which is expected to bring about transparency and clarity," the Central
Board of Direct Taxes.
The proposal, which has been put up seeking public comment, hinges on three tenets.

Profit-linked, investment-linked and area-based deductions will be phased out for both
corporate and non-corporate tax payers.

Provisions having a sunset date will not be modified to advance the sunset date and, In the
case of tax incentives with no terminal date, a sunset date of 31 st March, 2017 will be
provided either for commencement of the activity or for the claim of benefit depending upon
the structure of the relevant provisions of the Act.

From 1st April, 2017 all forms of weighted deduction will be eliminated.

"This plan has been designed to prevent any abrupt loss to any business," Tax experts welcomed the
move saying it would bring down the corporate tax rate. "As promised, it clearly lays down that the
base tax rate for companies would be reduced from 30% to 25%. This will immediately bring down
the effective tax cost for companies and is bound to increase investment activity in the country,"
Schemes of exemption for special economic zones and units run in perpetuity, and a sunset date is
being proposed as there is no deadline in the law for investments to come in. Tax exemptions already
have a sunset date and so will not be renewed.
Besides SEZs, commercial production of natural gas in blocks licensed under CBM IV and NELP
VIII, and mineral oil from blocks licensed up to March 31, 2011 will also sunset on March 31, 2017.
Deduction for expenditure on scientific research is proposed to be curtailed to 100% from 2017-18
from 200% at present. Accelerated depreciation, an incentive given to companies to encourage them

to invest more, alone added up to a tax loss of Rs 37,000 crore. Benefits to units exporting from SEZs
added up to another Rs 18,400 crore.
The rationale behind cutting down the corporate tax rates from 30% to 25% is to make it competitive.
Considering global standards, we in India have one of the highest tax rates which amount for India's
poor rank of 134 among the Ease of Doing Business Index.
In a bid to give stakeholders sufficient time to study the plan, the Finance Ministry has extended the
deadline to give comments on the roadmap for corporate tax exemption by over three weeks till 31 st
December 2015.

Lowering of tax rate can potentially boost entrepreneurship.

Secondly, it can also increase the tax collections if we go by the claims of the finance
ministry. India is placed on the backward slope so reducing tax rates should increase
compliance.

Thirdly, it must be kept in mind that in recent times corporate tax has become the largest
source of tax revenue. Therefore it becomes important to bring it down to a level where it is
more acceptable to the corporates while gradually phasing out unnecessary exemptions.