FinMin weighs fiscal cost of corporation tax cut

The finance ministry is assessing the fiscal cost of reducing the corporation tax rate, which currently stands at 30 per cent, in the upcoming Budget. Any such move will be contingent upon the goods and service tax (GST) proceeds this year and the projections for next year.

In the 2015-16 Budget, Finance Minister Arun Jaitley had promised a reduction in the corporate tax rate from 30 per cent to 25 per cent in four years.

According to the internal calculations of the ministry, slashing the rate by five percentage points would result in a hit of Rs 70,000-80,000 crore to the exchequer. This is about 13 per cent of the current year’s corporation tax collection estimate of Rs 5.3 lakh crore.

Even a reduction by three percentage points, to 27 per cent, will cost the government about Rs 40,000-50,000 crore. That is something senior policymakers in the North Block can ill afford, given a fiscal deficit target of 3.2 per cent of gross domestic product in 2017-18, and expectations of a three per cent target in 2018-19.

Towards a road map to reduce the corporation tax to 25 per cent, the government laid down a time frame to simultaneously phase out the exemptions given to the corporate sector, simplify administration, and improve India’s competitive edge globally. 

In the 2016-17 and 2017-18 Budgets, corporate tax cuts were announced only for small businesses. Sources said 2018-19 being the last full Budget before the 2019 general elections, the finance ministry is weighing its options. “More than 80 per cent of the revenue in corporation tax comes from large firms. So, if the tax rate for large firms is reduced, the exchequer will take a hit as the exemptions are yet to phase out,” said an official. 

“The government had promised in 2015-16 that the corporate tax will be reduced. However, any decision will depend upon what our projections for the GST are, this year and the next, as we have a tight fiscal space,” said another official.

While the corporation tax rate for big companies is 30 per cent, the effective rate of taxation is close to 23 per cent on account of a large number of exemptions. The revenue foregone in 2016-17 on account of tax deductions stood at Rs 83,492 crore. 

Revenue projections from the GST remain unclear. It stood at the lowest level in four months at Rs 83,000 crore in October. The refunds on account of input tax credit and integrated GST for exporters will put further stress on collections going ahead. Any fiscal slippage could lead to a deviation from the road map for next year as well.

There could be a tax revenue shortfall of Rs 20,000 crore due to revisions in the GST rates announced for over 200 items in November, Bihar Deputy Chief Minister Sushil Modi said in the last GST Council meeting in Guwahati. However, central government officials maintain that was Sushil Modi’s view, and that any shortfall could be offset by greater compliance and an increase in demand.