The fear of chasing away potential investors from the infrastructure sector may have prevented the government from proposing sweeping changes in the individual and corporate income tax rate slabs.
“The lower tax rates, both for corporates as well as individuals, were essentially to be funded by minimum alternate tax (MAT). This provision (MAT) was the one which raised the maximum concern among businesses,” Finance Minister Pranab Mukherjee told Hindustan Times during an interview last Friday.
The government’s original plan, as proposed in the first direct taxes code (DTC) draft, was to neutralise the loss in revenue by changing the income tax slabs and rates by ensuring higher collections through a 2 per cent minimum alternate tax (MAT) regime charged on gross assets, instead of profits.
However, Indian firms said this might chase away investors because they would be forced to pay taxes even before breaking even. MAT was introduced in fiscal 1998 to address an inequity in taxation.
Many profitable companies avoided tax by exploiting permissible deductions to become “zero tax” firms.
“A substantial part of MAT revenue would have come from long gestation period companies in infrastructure areas or from companies who were in losses owing to the cyclical nature of their industry,” Mukherjee said.
He said given the state priority that calls for $1 trillion investments in infrastructure, the government was forced to dilute the original proposals.
In August last year, the DTC draft had proposed personal income tax to be charged at 10 per cent for incomes between R1.6 lakh and R10 lakh, 20 per cent for R10-25 lakh and at 30 per cent beyond R25 lakh.
It had also proposed to slash the corporate income tax rate to 25 per cent from 30 per cent.
* However, the changes proposed in the DTC bill introduced in Parliament last month are not that lenient. The bill plans to exempt incomes up to R2 lakh per annum (against the current R1.6 lakh) and tax incomes between R2 lakh and R5 lakh at 10 per cent, R5-10 lakh at 20 per cent and higher incomes at 30 per cent.