Arbind Modi panel in 2018 suggested corporation tax cut; govt didn't accept

Had proposed abolition of dividend distribution tax, securities transaction tax

The first panel on the direct taxes reform, set up by the government to rewrite India’s income-tax laws, had last year recommended a sharp cut in the corporation tax rate to 15 per cent from 25-30 per cent now.

It had also proposed equally bold changes such as abolishing the securities transaction tax (STT) and dividend distribution tax (DDT), and restructuring the long-term capital gains (LTCG) tax.

The panel, headed by Arbind Modi, then member of the Central Board of Direct Taxes (CBDT), proposed taxing income from dividend and long-term capital gains at the level of the individual, with changes in personal income-tax rates.

Sources in the know say the panel had submitted the report to the office of the finance minister at the end of September last year, but the government did not accept it as the final report then, following objections raised by some of the panel members.

Subsequently, the government appointed Akhilesh Ranjan, a CBDT member, as the panel head and kept the other members unchanged. The new panel is expected to submit its report by July 31 this year.

Some recommendations of the old report may stay in the final one, the sources said.

The panel had recommended changes in accounting procedures that broaden the scope of taxable corporate income. With tax simplification and improvement in compliance, and “efficiency and equity” in tax collection, corporate tax revenues would get a boost, the report had said.

But the report did not exclusively propose eliminating incentives and exemptions, which are being slowly phased out.

These measures could reduce companies’ cost of capital, enhance returns on equity, remove the bias in favour of debt capital, and boost private investment, the report had argued.

Business Standard has reviewed a copy of the report.

At the same time, the panel estimated those tax cuts would increase corporation tax collection in 2016-17 by 15-20 per cent if put into effect.

Coincidentally, the Economic Survey for 2018-19 had put reviving private investment as the most critical driver of the economy.

Where the members of the panel could not reach a consensus, the report provided dissenting views as options.

The panel's report noted that the corporation tax rate cut should be complemented with changes in rules specifying the source of income, which would expand the corporate tax base. This model recommended a shift from “residence-based” taxation to “source-based” taxation for companies having operations in India.

This, in a hypothetical sense, would increase the tax incidence on multinationals headquartered outside India but having a “significant economic presence” in India.

However, it also recommended that foreign companies should be taxed at 15 per cent, at par with domestic companies.

It proposed cash accounting of all corporate incomes, where there is no distinction between (a) revenue and capital expenditure; (b) resident or non-resident (in terms of the presence of companies or promoters); and (c) debt and equity capital.

‘This will enhance the scope of income, enlarge the corporate tax base, and compensate revenue losses on account of the tax rate cut, the report said. The second model recommended incremental progressive changes to the existing law. It maintained the older system (accrual) of accounting of receipts and expenditure, keeping the “resident-based” taxation rules intact.

Terming the 2016 Budget move to grandfather tax incentives “bold”, the report did not conclusively comment on eliminating incentives, but proposed the MAT (minimum alternate tax) in various avatars.

This model gave three choices for levying the MAT: 1.25 per cent on gross assets, 12.5 per cent on Ebitda (earnings before interest, tax, depreciation and amortisation), or 1.75 per cent on turnover, with a preference for the first option.

On the issue that the MAT affected loss-making companies by taxing them too, the report said it would push them to do corporate restructuring.