September 11, 2014
The taxation system practised globally has undergone drastic changes in the recent past and it is speculated that this trend will continue in the coming future. Studies have found that the reasons which lead the authorities to keep changing the taxing trend in the nation concerned vary in nature. Some of them could be the pressure on the authorities to collect more taxes due to the economic challenges faced; in case of developed countries, the public scrutiny of companies operating globally; complexities arising from new business models such as e-commerce and cloud computing and many more.
The levying of corporate tax in several countries has been a debatable topic for experts as its rates vary considerably in different countries. The corporate tax rates have stabilised after a decade of decline, while indirect tax rates and their ambit have increased globally.
Every particular nation fixes a particular tax rate, which depends upon variety of factors. These factors mainly include a mix of historical baggage a nation carries, its current state of economy (largely dependent upon the role played by the government as a welfare state), the funds required for socio-economic development, the rates fixed by other countries who compete for similar capital resources, level of tax compliance, etc.
Corporate tax in India for a company based locally, currently stands at 33.99% (net income of the company exceeding INR 10 crore). Indian corporate tax rate is not the highest when compared globally, the other countries that fall in similar higher corporate tax category include the US – 40% (the highest), Japan – 35.64%, Argentina and Zambia – 35%, Venezuela – 34%, Belgium – 33.99% and France – 33.33%.
Though the economies of the above nations vary considerably in terms of strength and business competitiveness, yet they all fall in the higher corporate tax rate category both on standalone basis and also in comparison with their peer nations.
When the experts studied the corporate tax rates of the the nations clubbed together under the BRICS acronym (which stands for Brazil, Russia, India, China and South Africa), an interesting scenario was found as the corporate tax rate of individual countries varied considerably. For instance, India’s corporate tax rate of 33.99% is comparable with Brazil’s 34%. South Africa, at 28%, stands in the middle. On the contrary, Russia’s tax rate of 20% and China’s tax rate of 25% score more brownie points being much lower rates in comparison to India.
Asia Pacific region
The corporate tax rate in some major economies in the Asia-Pacific region was found to be not more than 30% with Hong Kong and Singapore levying the lowest – 16.5% and 17%, respectively. Both the nations have been considered favourable business destinations for multiple economic reasons.
According to experts, the standalone comparison of the corporate tax rate would not yield the true picture about the effectiveness or attractiveness of a particular country as a business destination. They suggest that many other important factors such as actual effective tax rate, economic incentives, the certainty and stability of the tax regime, dispute resolution mechanisms, etc, play an important role in determining the attractiveness of a particular economy.
A higher tax rate makes cost of doing business in India significantly high. To make India an attractive business destination, the government should consider reviewing and lowering the tax rates. The revision in tax rate could start with the removal of education cess and surcharge, that would bring down the tax rate to 30%. Gradually, over a period of say 5 years or so, the corporate tax rate could be reduced in a step down manner to 25% which will make the country an important business hub.