The government may cut the corporate income tax rates by 1.25-1.5 percentage points to 28.75-28.5 percent in the Budget for 2017, but will likely remove a plethora of exemptions that allow companies to cut down on their effective tax payouts.
The move, which finance minister Arun Jaitley had first announced in 2015, will signal the beginning of reforms of one of India's complex tax systems that had become mired in layers of exemption and sops over the years, making it difficult to administer.
Currently, there are 32 incentives applicable on corporate profits before calculating tax. While the statutory tax rate of 33.99 percent, including cesses and surcharges, companies are paying an effective tax rate of 24.67 percent after factoring in incentives, exemptions and tax deductions.
There is also speculation that the government may also change the definition of "long-term," raising the time limit for capital gains tax relief to a minimum of three years from one year at present.
Definition of long-term could be widened to align the investment lock-in threshold with many matured economy markets. The new rule may be compatible with amended tax treaties with Mauritius and Singapore
A change in the definition of "long-term", if announced in the budget for 2017-18, could likely prompt millions of individuals who trade in stocks to shuffle their savings portfolio.
Under current rules, gains made on a listed company stock are tax free is the investor exits after a year. The changed definition, however, would imply that investors-both retail and institutional-will have to pay 15 percent tax on the premium or gains made if the stock is sold within three years.
If implemented, the revised definition will align the rules closer to many matured economy markets where threshold for "long-term" investment lock-in is set at three years or above.