From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Direct Tax Code; Direct tax reforms
A panel set up by the government to review the direct tax code (DTC) has submitted its report.
- Its recommendations would supplant the existing Income Tax Act of 1961.
- There are hints towards the contents of the report:
- relief in tax rates for individual taxpayers
- simpler assessment procedures
- lower corporate tax rate even for large companies
- fewer exemptions
- use of Artificial Intelligence to curb tax evasion
- replacement of “assessing officers” with “assessment units” is reported
- mediation process to settle tax disputes
Benefits to corporates
- It could reduce the harassment of taxpayers.
- It will be the most effective rationalization of corporate taxation.
- The panel proposes a 25% corporate tax rate to all firms without exception.
- 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.
- The size cutoff is not just arbitrary, it deters firms just under the limit from growing bigger.
- 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%
- 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%.
- Big Indian corporations pay a base rate of 30%, with add-on cesses and surcharges taking the effective rate to 35% or so.
- Firms must compete with others not just on product quality and prices, but also on raising capital. A high rate serves as a handicap.
- Policy-imposed constraints on corporate profitability also result in lower investible surpluses, leading to slower growth.
- 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.