BUDGET COUNTDOWN. Cut to grow?

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 ago, 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 per cent, a 25-per cent 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 per cent to incentivise the retention of profits in US.

In 2015, our own FM had signalled the need for lower tax rates. , 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 per cent 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 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, 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 thy neighbour” corporate tax rate reduction policies of others.

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

Budget soothsayers hope to inter alia answer two questions — (i) are we expecting slashed tax rates on February 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, given the expected counter-balancing effect of lower tax rates and reduced incentives.

The government 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 and global headwinds , 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 sum, we can expect an advancement of the deadline for reaching the target tax rate of 25 per cent, 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 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 writer is Tax Partner, EY India. With inputs from Swathanth R, senior tax professional, EY India

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