Government's proposal to cut corporate tax to 25 percent over three years is likely to bring in transparency in tax collections, India Ratings and Research said on Monday.
"The government's proposal to reduce corporate tax to 25 percent over the next three years from the existing 30 percent is likely to aid transparency in tax collections and bring a greater focus on returns based on economics," the agency said in a report.
The move will help the government reduce the amount of incentives paid, necessitating low tax paying corporates to shell out significantly higher taxes.
According to a study done on top 500 corporates by the rating agency, while the effective tax rate on an aggregate basis for last fiscal was 24 percent, half of the corporates paid taxes at lower than the proposed rates of 25 percent.
In fact, some of the largest corporates paid taxes at an effective tax of below 10 percent. The plan to withdraw tax incentives in a phased manner will result in lower deductions, and therefore, higher tax outflows.
"Also, the withdrawal of incentives is likely to impact corporates largely in eight key sectors - oil and gas, IT & ITES, auto and auto ancillary, power and infrastructure, telecom, mining, pharmaceutical, and healthcare," it said.
The contribution of these sectors to the overall corporate tax revenue is likely to touch 90 percent in the medium term from 85 percent in 2014-15.
The agency further said it believes that the sectors identified as priority sectors such as agriculture and allied activities including fertilisers, small and medium enterprise, rural development, water supply and sanitation, education will continue to avail tax incentives given the central mandate to support these industries.