US tax cut may find echo in Budget

Senate Majority Leader Mitch McConnell, accompanied by members of the Republican Conference, speaks at a news conference about the passage of the Tax Cuts and Jobs Acts at the US Capitol in Washington, US, on Wednesday. Photo: REUTERS
The recently passed tax law change in the US is going to increase the pressure on the Narendra Modi government to move faster on its earlier commitment to reduce the corporation tax rate to 25 per cent. And, to offer more to India Inc for making local companies more competitive.

The US corporation tax rate has been reduced to 21 per cent, from 35 per cent. Experts say this increases pressure on Finance Minister Arun Jaitley to cut these rates in the coming 2018-19 Union Budget. 

In the 2015-16 Budget, he’d promised a reduction in the corporation tax rate, from 30 per cent to 25 per cent, over four years. To that end, the government had laid down a schedule to simultaneously phase out exemptions to the corporate sector. There were corporation tax cuts only for small businesses in the 2016-17 and 2017-18 Budgets.

“The US tax reform should help hasten the pace and widen the ambit. This would be important to ensure steady flow of capital to India and also to accelerate the delayed capex recovery,” said Sanjay Sanghvi, partner, Khaitan & Co.

Deloitte India’s Neeru Ahuja said for India to remain competitive in global markets, there will be pressure to cut corporation tax rates here. “There are other proposals which encourage domestic investment and bringing back of monies into USA. Other countries are following these developments closely and Japan has also announced expanded tax credits and incentives,” Ahuja said. With these developments, India Inc will be seeking similar fiscal incentives. 

Sanjaya Baru, secretary-general of business chamber Ficci, said the US tax changes put Indian business at a disadvantage, not only because of rate cuts but for imposing countervailing duties on foreign companies. “The long-term consequences of this can be quite adverse. This puts Indian exporters at a disadvantage. We are concerned about the implications and the finance ministry assured us they will examine the issue,” he said.

Ficci made a detailed presentation on the US tax proposals to Jaitley and Finance Secretary Hasmukh Adhia during pre-Budget consultations earlier this month, Baru said. He added other economic blocs, including the European Union, were considering  countervailing duties of their own to respond to the US and India should consider likewise. 

“The rate should be brought down across the board to at least 28 per cent in this Budget. The revenue implications will be offset by the gains from exemptions no longer being available,” said Abhishek Goenka, partner at consultancy PwC

As reported by Business Standard earlier, internal finance ministry calculations say a reduction to 25 per cent, excluding the exemptions, would result in a hit of Rs 70,000-80,000 crore to the exchequer. This is about 13 per cent per cent of the current year's corporation tax collection budget estimate of Rs 5.3 lakh crore.

The exemptions will essentially go by 2022 and any reduction in rates in 2018-20 will result in a loss to the exchequer, making the move fiscally difficult for the government. Even a three percentage points reduction to 27 per cent will cost the government Rs 40,000-50,000 crore.

While the corporation tax for big companies is 30 per cent, the effective rate of taxation is close to 23 per cent on account of the large number of exemptions. The revenue forgone in 2016-17 on account of deductions was Rs 68,000 crore.

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