Corporate tax rate may be clipped to 30%

Some tax exemptions face the axe in Budget.

The government is considering reducing the corporate tax rate to bring it on a par with the peak income tax rate of 30 per cent. The corporate tax rate now is 35 per cent.

Government officials told Business Standard the Budget for 2005-06 was likely to integrate personal and corporation taxes as had been recommended by both the Kelkar task force on direct taxes and the advisory group on tax policy and tax administration for the Tenth Plan, headed by Parthasarathi Shome.

The officials said the government was also examining the income tax slabs.

"Although income tax rates in India are comparable with those in other countries, there is a view that income tax rates can be further reduced. Past experiences have shown that a reduction in tax rates has resulted in better tax collection," an official said, referring to P Chidambaram's 1997-98 "dream Budget", which had lowered the income tax rates. However, the reduction in income and corporate taxes is likely to be synchronised with the phasing out of certain exemptions.

"There is a view that the present exemption limit of Rs 1 lakh on income tax is on the higher side," the official said.

"Since the focus of the government is to widen the tax base, the present exemption keeps a large number of taxpayers outside the tax net. The thinking is to have lower tax rates with lower exemptions to meet the objective of widening the base and checking evasion and increasing compliance," he said.

The advisory group for the Tenth Plan, headed by Shome, which is being considered as a part of the Budget exercise, had favoured a moderate exemption limit of Rs 50,000.

Interestingly, several Asian giants such as Japan, China and Korea and others like the Philipines, Taiwan, Pakistan and Sri Lanka have personal income tax rates that are higher then India. These countries, however, have lower corporate taxes than India.