Published Editorial

Budget 2017 - Tax rates and incentives – what’s the connection?

January 2017

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Hindu Business Line

By

Ashwin Ravindranath
Tax Partner, EY India

The race for investment remains unprecedented, with countries vying with each other to bolster economies that continue to remain choppy at best. If the UK surprised many with tax competitiveness a few years back, the US has joined the bandwagon of lowering tax rates with the Trump Tax Plan.

The Republican Party’s Tax Reform Blueprint proposed a reduction of statutory corporate tax rate to 20%, a 25% business tax rate for pass-through entities and elimination of most business preferences.  Further, Trump’s tax plan looks to reduce the corporate tax further to 15 percent to incentivize the retention of profits in US.  

Our own FM threw India’s hat into the ring in 2015 signalling the need for lower tax rates.  Far from this being a knee-jerk reaction to the gauntlet thrown down by others, India’s articulated journey to more benign tax rates had commenced then, when the Budget laid down an intent to reduce tax rates to 25% over a four-year period.  Because deficits are as much a concern as competitiveness, the move was accompanied by a signalled intent to wean taxpayers away from the tax incentives, through sunset clauses on tax holidays, reduced weighted deductions/ accelerated depreciations, et al.

While a reduction in the corporate tax rates is generally seen as a stimulus for further investments, thereby propelling economic growth and generating employment, in the current global race of tax rate moderation, it might almost seem unavoidable – if only to counter the “beggar my neighbour” corporate tax rate reduction policies of others.

Do all trends point to lower tax rates? In the Indian context, one oft-repeated statistic has been the tax-GDP ratio, which has been dragging its feet amongst other better performing macro-economic indicators. The tax-GDP ratio of India is quite low at about 16%, in comparison with the averages in emerging economies (21%) and OECD countries (34%). This will be a cause for concern in reducing the tax rate, especially with GST implementation all but unlikely before July 2017.

As is wont at this late hour, Budget soothsayers hope to inter-alia answer two questions – (i) are we expecting to read headlines of slashed tax rates on Feb 1; and (ii) what happens to the well-loved but depleted and few residual corporate tax incentives?

The entwined nature of the two questions lie in the FM’s own speech of Budget 2015 mentioned earlier, given the expected counter-balancing effect of lower tax rates and reduced incentives.

A Government that has taken pride in itself on being transparent and consistent in intent may find it difficult to advance the announced deadlines for winding down incentives, causing consternation in the investor community on investment decisions that were premised on this policy statement.

In a world of surprises (take your pick amongst shock demonetisation therapy, Brexit referendum, US elections) and global headwinds that have confounded pundits in the press and commentators alike, I can come up with several excuses to sit on the fence on whether we will see something immediate and of significance in this Budget.

In closing, I dare say, we expect an advancement of the deadline for reaching the target tax rate of 25%, given the buoyancy in tax collections this year, achieved on the back of a targeted carrot and stick policy – disclosure schemes accompanied by and followed by squeezes applied on the parallel economy. Our past and current affinity for surcharges and cesses may however moderate the exuberance should this happen, inching up the cost from the rate that hits the press to the one that you actually cut a cheque for.

The path for withdrawal of incentives I hope remains as stated earlier.

(Swathanth R, senior tax professional, EY India also contributed to the article)