How to do $5 trillion by 2024: Next steps after corporate tax rejig
Abstract:
In what is arguably one of the boldest reforms in the last 20 years, finance minister Nirmala Sitharaman has cut the effective tax rate on corporate profits from approximately 35% to 25.2% for existing domestic companies and 17% for new manufacturing companies established before October 31, 2023, provided the companies take no exemptions. For existing companies, the tax rate is now below or equal to those in Japan, South Korea, China, Indonesia and Bangladesh though higher than those in Taiwan, Thailand, Vietnam and Singapore. For new manufacturing companies, the tax rate equals that in Singapore but is below those in all other countries just named.
By putting an end to exemptions, the government has greatly simplified the corporate profit tax system and thus eliminated numerous sources of bribes, harassment and tax disputes. Provided the government does not let exemptions slip back into the system, it would have limited future tax disputes to reporting of revenues and costs. Tax inspectors will no longer be able to harass enterprises and extract bribes from them by questioning the exemptions sought by them.
There is a strong case for a similar reform of personal income tax. Far too many exemptions, which erode the tax base, have led the government to increase the top effective marginal tax rate to 43%. High rates with loopholes embedded in exemptions invite corruption and harassment. Aligning the top personal income tax rate to the corporate profit tax rate at 25%, with all exemptions eliminated, would curb corruption and minimise tax disputes.