Person filing tax return forms. (Photographer: Luke Sharrett/Bloomberg)

Corporate Tax Cuts Need To Be Backed By Anti-Evasion Measures, Says CBDT

India can’t reduce the corporate tax rate without backing it with strong anti-evasion measures, and a cut by the U.S. or talks to lower rates by the European Union nations shouldn’t result in a kneejerk reaction, according to the head of the task force constituted to redraft income tax laws.

“A mere reduction in (corporate) tax rate cannot happen, it has to be accompanied by a host of measures,” said Akhilesh Ranjan, member at the Central Board of Direct Taxes. “Most importantly, it has to be accompanied by very strong anti-avoidance mechanisms.”

Finance Minister Arun Jaitley, in the budget for 2015-16, promised to lower the corporate tax rate from 30 percent to 25 percent in four years after phasing out exemptions and incentives since they created pressure groups and led to avoidable discretion. That cut hasn’t materialised yet.

Ranjan, speaking at an international tax conference, said the corporation tax rate must be decided by each country according to its own needs. “We [India] need more investment, we need incentives to continue for some sectors,” he said, adding that there’s also a need to be consistent with what’s happening around the world. All these factors, according to Ranjan, will decide what the tax department does with corporate tax rates.

Ranjan said countries in the European Union are not just talking about tax cuts but also discussing anti-avoidance mechanisms. While the U.S. reduced its tax rate to 21 percent, he said it has the Base Erosion and Anti-abuse Tax, or BEAT, tax on intangibles and various ways to ensure the its tax base is augmented.

BEAT, part of the U.S. Tax Cuts and Jobs Act, is a minimum tax calculated on a base equal to the taxable income determined without considering tax benefits. “So, if you want to reduce tax rates, you cannot sacrifice revenues,” Ranjan said. “Revenues have to be maintained and therefore the tax base has to increase.”

To increase the base, the tax department will have look into compliance mechanisms and come up with new initiatives directed at anti-avoidance, he said. “We need to preserve and augment the tax base and only if we feel confident that these measures can yield the desired revenue, that would be the stage where we can think of reducing corporate tax rates.”

Sushil Chandra, chairman of Central Board of Direct Taxes and Customs, said 99 percent of Indian companies pay corporate tax at 25 percent. Compliance should be good so that the government is able to reduce rates further, he said.