NEW DELHI: As discussions around potential cuts in the US corporate tax rate gain momentum post-Donald Trump’s presidential victory, India may find itself at a critical juncture, needing to reassess its own corporate tax framework to remain competitive in attracting foreign investment.
However, experts are of the view that the dynamics of tax rates are complex and influenced by various factors beyond mere comparison with US rates.
The government announced a significant cut to the corporate tax rate for domestic companies from 30% to 22% in 2019, and for new manufacturing companies, the rate was set at 15%. Despite these reductions, India’s corporate tax rates remain relatively high compared to some ASEAN and OECD economies.
Akhilesh Ranjan, Advisor with PwC and Former Member of the Central Board of Direct Taxes (CBDT), points out that while India has already reduced its corporate tax rates in recent years to foster economic growth, the global investment landscape is dynamic.
“A competitive corporate tax regime is crucial, but it must be complemented by improvements in infrastructure, regulatory frameworks, and labour market conditions,” Ranjan said.
He says that India does not need reconsider its approach to tax policy as the current strategy to stabilise the tax regime aims to provide predictability for investors.
Surajkumar Shetty, Partner at JSA Advocates and Solicitors, notes that the difference between India’s corporate tax rate of 22% and the US rate of 21% is not that significant.
After accounting for surcharges and cess, India’s tax rate touches 25%. He emphasized that India offers numerous benefits that can lower the effective tax rate for foreign companies.
Riaz Thingna, partner at Grant Thornton Bharat, emphasizes that investments are primarily guided by business opportunities and returns, with tax acting as a sweetener.
While the United States’ potential move toward lower corporate tax rates will require a relook at India’s corporate tax policy, Thingna highlights that India’s ambitious capital outlay on infrastructure and fiscal prudence will limit its ability to reduce tax rates easily.
To continue attracting FDI, India may consider moderate and gradual tax rate reductions while ensuring stable and predictable tax policies, faster dispute resolution, and reduced tax administration complexities will play an even greater role in attracting investment, he said.
Aashish Kasad, Tax Partner, EY India, concurs with Thingana. She says to safeguard its position as a premier investment destination, India might need to recalibrate its corporate tax rates, striking a delicate balance between attracting foreign investment and fostering a sustainable revenue system.
Meanwhile amid fears that the minimum tax under Pillar 2 is in peril under the Trump regime, Ranjan said, “India currently does not appear to be in a hurry to implement the minimum tax under Pillar 2, as the likely revenue gains may not justify the high costs associated with its administration. Therefore if Trump remains unsupportive of Pillar 2 taxation, it is unlikely to have any significant impact on India.”