Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

[op-ed snap] Some tax relief for our corporate sector

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Direct Tax Code; Direct tax reforms

CONTEXT

A panel set up by the government to review the direct tax code (DTC) has submitted its report.

Facts

  1. Its recommendations would supplant the existing Income Tax Act of 1961
  2. There are hints towards the contents of the report:
    1. relief in tax rates for individual taxpayers
    2. simpler assessment procedures 
    3. lower corporate tax rate even for large companies
    4. fewer exemptions 
    5. use of Artificial Intelligence to curb tax evasion
    6. replacement of “assessing officers” with “assessment units” is reported 
    7. mediation process to settle tax disputes

Benefits to corporates

  1. It could reduce the harassment of taxpayers. 
  2. It will be the most effective rationalization of corporate taxation. 
  3. The panel proposes a 25% corporate tax rate to all firms without exception.
  4. 99.3% of all corporate assessees may already be in the 25% bracket. But the division between small and large companies is hard to justify.
  5. The size cutoff is not just arbitrary, it deters firms just under the limit from growing bigger
  6. Large companies in the 30% tax bracket account for the bulk of revenues raised this way burdening corporate India. These are the country’s biggest job providers. They need to be globally competitive.

Problems with 25%

  1. Even at 25%, India Inc. would be paying more money than companies in other parts of the world. The global average corporate tax rate is around 23%. 
  2. Big Indian corporations pay a base rate of 30%, with add-on cesses and surcharges taking the effective rate to 35% or so. 
  3. Firms must compete with others not just on product quality and prices, but also on raising capital. A high rate serves as a handicap.
  4. Policy-imposed constraints on corporate profitability also result in lower investible surpluses, leading to slower growth. 
  5. It hurts their ability to take on global competition and turn into world-beaters.

A lighter tax burden may curtail revenues but could have a positive impact that would more than compensate for this loss in the long term.

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