The global tax landscape has witnessed dramatic changes in the recent past and it is likely that this trend will continue in the foreseeable future.
The reasons could be varied — economic challenges putting increased pressure on the revenue authorities to collect taxes; global companies coming under public scrutiny especially in developed countries; complexities arising from new business models such as e-commerce and cloud computing; and so on.
On the corporate tax front, tax rates in many countries have stabilised after a decade of decline, while indirect tax rates and their ambit have increased globally.
On the higher side
Interestingly, corporate tax rates in different countries vary considerably.
Each country fixes a particular tax rate depending upon various factors including a mix of historical baggage it carries, the current state of economy like the extent of the role played by the government as a welfare state, funds required for socio-economic development, rates fixed by other countries who compete for similar capital resources, level of tax compliance, etc.
Currently, Indian corporate tax rate for a domestic company stands at 33.99 per cent (where net income exceeds Rs. 10 crore). Though not the highest, this is still among one of the higher tax rates when compared globally.
The countries that fall in similar higher corporate tax bracket include France at 33.33 per cent, Belgium (33.99 per cent), Venezuela (34 per cent), Argentina and Zambia (35 per cent), Japan (35.64 per cent) and the US at 40 per cent.
All these economies vary considerably in terms of their economic strength and business competitiveness, however, they all fall in the higher corporate tax rate category both on standalone basis and also in comparison with their peer nations.
Bloc by bloc
A comparison of the Brics (Brazil, Russia, India, China and South Africa) bloc paints an interesting scenario where the corporate tax rate varies in the range of 20 per cent to 35 per cent, strengthening the view that though these countries are generally clubbed together under the Brics acronym, they vary considerably on different economic parameters including their tax rates.
For instance, India’s corporate tax rate of 33.99 per cent is comparable with Brazil’s 34 per cent. South Africa, at 28 per cent, stands in the middle.
On the contrary, Russia’s tax rate of 20 per cent and China’s tax rate of 25 per cent score more brownie points being much lower rates in comparison to India.
A look at some of the comparable Asia-Pacific countries again paints a varied picture.
Corporate tax in Australia and Philippines stands 30 per cent. And this looks much higher in comparison with China, Malaysia and Indonesia at 25 per cent.
Corporate tax rates in Hong Kong and Singapore — at 16.5 per cent and 17 per cent, respectively — definitely stand out and look very attractive on a standalone basis.
Both Hong Kong and Singapore have been considered favourable business destinations for multiple economic reasons, with lower tax rates contributing significantly to this advantageous position.
Similar to the Brics and Asia-Pacific region, a comparison of the developed economies also shows wide differences in the tax rates.
For instance, the corporate tax rate in UK at 21 per cent (20 per cent from April 2015) is almost half in comparison with tax rate in the US at 40 per cent. Canada at 26.5 per cent, Germany at 29.58 per cent, Italy at 31.4 per cent, and Japan at 35.64 per cent stand in between.
Interestingly, few of the countries stand out in the global comparison with very low corporate tax rates. Switzerland at 17.92 per cent, Taiwan (17 per cent), Kuwait (15 per cent), Ireland (12.5 per cent), Bulgaria and Qatar at 10 per cent appear to be very attractive tax rates.
However, not all these economies are comparable among themselves or even with India.
Lower the better
It is a fact that a 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.
Many other important factors such as actual effective tax rate, economic incentives, the certainty and stability of the tax regime, rigour and rigidity of tax authorities, dispute resolution mechanisms and so on play an important role in determining the attractiveness of a particular economy.
Besides, many overriding considerations, such as safety and security of business assets and human workforce play an overarching role in any long-term business decision.
Nevertheless, a higher tax rate makes cost of doing business in India significantly high. To make India an attractive business destination, it should consider reviewing and lowering the tax rates.
To begin with the education cess and surcharge may be removed, that would bring down the tax rate to 30 per cent. Gradually, over a period of say 5 years or so, the corporate tax rate could be reduced in a step down manner to 25 per cent.
Lower tax rates would encourage companies to consider India as an important business hub and this would be in conformity with Prime Minister Narendra Modi’s call to companies to “Make in India”!