INDIA: More Corporate Tax Reliefs in the Offing?

As published on newindianexpress.com, Thursday October 31, 2019.


The stock markets have been on a roll for the last four-five days, and with the BSE scaling 40,000 points—the highest in four months—there seems to be an unmistakable Deepavali zing in the air. The immediate reason for the turnaround is the buzz emanating from the Prime Minister’s Office (PMO) of the second round of tax reforms in the offing.

Various unverified reports are predicting the abolition of the dividend distribution tax, or a possible merger of three onerous taxes on corporate income—the securities transaction tax, the tax on long term capital gains (LTCG) of Rs 1 lakh and above, and dividend distribution tax—into one single tax instrument.

If these reports turn out to be true, these will be the second set of reforms after the withdrawal of the ‘super-rich’ tax of the last Budget, which had put a huge damper on fresh investments, along with the cut in corporate tax rates. Many of these taxes amount to double taxation of the same income and are difficult to justify.

For instance, the dividend distribution tax is paid by companies on dividend given from its earnings to investors at an effective rate of over 20%. In addition, these companies pay corporate tax varying from 21% to 40%. These, and the recently introduced LTCG tax on equity income had driven offshore investors to other markets and slowed an already groaning economy.

Many of these reliefs were being planned for the next February Budget, but may now be implemented before the calendar year is over. The ruling party’s below-par showing in the recent Assembly elections has also speeded up the reforms pipeline.

Through these steps, the government is hoping India becomes a more attractive investment destination. And together with a spurt in the domestic capital expansion, it is expecting to crank up the economy. It is estimated the government may lose out Rs1.5 lakh crore in taxes on account of these reliefs. But the immediate and short-term targets of changing the negative business and growth perceptions seem to have gained higher priority.

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