The Hindu Business Line : Corporate sector deserves better treatment

IN MOST countries, corporate entities are subject to tax on their profits on a standalone basis and the dividends distributed thereon are also taxed in the hands of the shareholders subject to exemptions up to a point.

Some countries have experimented exempting dividend in the hand of the shareholders and levying tax on distributed profits in the hands of the company itself.

India started this experiment in 1997, withdrew it in 2002 and re-introduced the same in 2003.

Today corporate India has to pay dividend distribution tax at an effective rate of 13.068 per cent; this is over and above the corporate profits tax of 36.592 per cent.

In view of several incentives which continue for various purposes, the concept of Minimum Alternate Tax (MAT) applies to corporate profits at an effective rate of 7.841 per cent. Multifarious levies in the hands of the company have complicated the tax system for the corporates.

The effective tax outflow in the hands of the corporates today is quite high compared to global standards. The position in other countries is summarised in the Table `Corporate taxation across the world'.

Justification

It is natural that company as a separate entity has to pay tax on its profits notwithstanding the fact that the company acts as a conduit which directs the flow the profits from the business to the owners, that is, shareholders.

The Kelkar Task Force Report on this point states thus:

"Taxation of companies as separate entities is also justified as a withholding tax, which may be a useful means of ensuring that income flowing through the conduit is taxed in a comprehensive and timely manner and that the base of the individual income tax is protected. Many economists, including some who have not advocated full integration, have argued that this withholding function is indeed the main argument for the imposition of a tax on corporate income."

Further corporate taxation is a simple device for taxing the important component of income from the capital.

If one were to abolish the concept of corporate tax and simply levy tax in the hands of the shareholders at a personal level on the dividends received plus net capital gains on share transfer, it would be extremely burdensome in terms of administrative and compliance cost.

The trends in the last few years have suggested that revenue flowing from corporate sector is increasing on a year to year basis and the position of growth in the last five years is as shown in the Table `Growing inflows from the corporate sector'.

It is easy to identify on a comparative basis a corporate taxpayer rather than millions of individual taxpayers. The Report has recommended levy of corporate tax in the hands of the company at 30 per cent which is the maximum marginal rate (MMR) in the hands of the individuals.

Further, it has also recommended exempting of dividends and long-term capital gains from tax in the hands of the shareholders.

There is also a statement in the Report which justifies this decision on the basis that this advocated method would not sacrifice the principles of `equity', since most investors in companies in India are likely to be taxed at the top MMR on personal income-tax.

The reasoning adduced in the conclusions reached have to be accepted with some reservations, as claims have already been made by the authorities that the number of taxpayers filing returns of income over Rs 10 lakh is only 75,000. Level of compliance in a country of 34 million taxpayers has fallen short of expectations.

Various types of statistics are available on lavish expenditure made by individuals across the country whose returns do not show commensurate incomes. The issue is not one of tax rates and global trends, but of strict compliance and effective monitoring.

The Kelkar report, one may argue, is very liberal in its understanding and appreciation of the performance of the corporate sector.

India Inc., will welcome the suggestion of a 30 per cent tax rate. It should be made clear that the 30 per cent rate should be just that, with no surcharge — the cess of 2 per cent may be acceptable as it is earmarked for a specific purpose.

Stability is a virtue and, so, once the recommendation is adopted, it should be continued with for at least the next five years.

(The author is a Chennai-based chartered accountant.)