Finance Minister Nirmala Sitharaman had in September last year announced the lowering of the base corporate tax rate to 22 per cent from 30 per cent for companies that do not seek exemptions and reduced the rate for some new manufacturing companies to 15 per cent from 25 per cent. Including surcharges and cesses (levies to raise funds for specific purposes), the effective corporate tax rate will drop by nearly 10 percentage points to 25.17 per cent.
The pre-Budget Survey, tabled in Parliament, said most of the companies (99.1 per cent) have a gross turnover of below Rs 400 crore (say small and medium companies) and are already taxed at the base corporate tax rate of 25 per cent. With surcharge and cess, their tax rate varies from 26 per cent to 29.12 per cent.
On the other hand, only 0.9 per cent of the companies i.e. 4,698 companies have a gross turnover of over Rs 400 crore and their effective tax rate varies from 30.9 per cent to 34.61 per cent.
"Thus, the impact of corporate income tax rate cut varies from gain of about 3.2 per cent to 13.5 per cent of the existing tax liability for small/medium companies to about 18.5 per cent to 27.3 per cent of the existing tax liability for large companies," it said.
With economic slowdown resulting in slippages in direct and indirect tax collections, the Survey said the next financial year is expected to pose challenges on the fiscal front.
"While on one hand the outlook for global growth persists to be weak, with escalated trade tensions adding to the risk; on the other hand, the pace of recovery of growth will have implications for revenue collections," it said.
In order to boost the sluggish demand and consumer sentiments, counter-cyclical fiscal policy may have to be adopted to create additional fiscal headroom, it said.
During the first eight months of 2019-20, the indirect tax collections have been muted. "Therefore, the revenue buoyancy of GST would be key to the resource position of both central and state governments."
On the expenditure side, rationalisation of subsidies, especially food subsidy, could be an important tool for expanding the headroom for fiscal manoeuvre, it added.
The Survey said 2019-20 was challenging for the Indian economy owing to the decelerating growth rate.
Among the various reforms introduced during the year to promote growth and investment, reduction in the corporate income tax rate was a major structural reform, which left a hole of Rs 1.45 lakh crore in the tax kitty. ANZ HRS