Corporate tax rate is an important factor in determining the attractiveness of a country for foreign investment.Other things being equal, investments are likely to be larger in countries that have a relativelylower corporate tax rate. This probably is the case with India. Although India is one of the fastest growing economies and has a higher growth than developed economies, it has not received huge amounts of foreign investments. According to the UNCTAD’s World Investment Report (2017), India received US$ 45 billion of foreign direct investmentin 2016 compared to US$ 134 billion in China and US$ 62 billion in Singapore, both of which have lower corporate tax rates. Thus, a higher rate of corporate tax deters foreign investments in India.
At 30 per cent, Indiahas one of the highest corporate tax ratesin the world. Additional levies like surcharge and cess increase the tax burden to around 34.5 per cent.Comparatively, even in neighbouring ASEAN countries, the corporate tax rates are low. It is 17 per cent in Singapore; 20 per cent in Thailand, Vietnam and Cambodia; 24 per cent in Malaysia; 25 per centin Indonesia and Myanmar. China also has a lower corporate tax rate of 25 per cent compared to India. Thus, a higher tax rate makes cost of doing business in India significantly high. The Global Competitiveness Report 2017 by the World Economic Forum also highlights that higher corporate tax rate is one of the most problematic factors in India.
It has been observed thatforeign companies prefer to invest in India through Mauritius or Singapore due to lower corporate tax. India has a Double Taxation Avoidance Agreement (DTAA) with these two countries, which allows a foreign investor the option of paying tax either in India or in Mauritius/Singapore. The tax rates prevailing in Mauritius (15 per cent) and Singapore (17 per cent) are amongst the lowest in the world. Therefore, many developed countries including the United States (US) prefer to route their investments in India through Mauritius and Singapore. This is alsoone of the reasons for falling investments in India from developed countries and increase in investments from Asian countries such as Mauritius and Singapore.
The Government is aware of this issue and is inprocess of reducing the corporate tax rate. In 2016-17, the corporate tax rate was reduced to 29 per cent for small enterprises with turnover not exceeding Rs. 5 crore. In 2017-18 budget, corporate tax rate was further reduced to 25 per cent for companies with annual turnover not exceeding Rs. 50 crore. In the latest budget, the rate has been reduced to 25 per cent for companies with turnover up to Rs. 250 crore. This selective reduction of corporate tax ratesdoesnotbenefit large companies, which generally form the majority of foreign investment.
Given the lack of domestic investments, India needs to attract more foreign investments in the country. To attract foreign investments, India should learn from countries such as China, Taiwan, Indonesia and Thailand.For example, in 2008, when China reduced its corporate tax rate from 30 per cent to 25 per cent,its foreign direct investments increased from US$ 83 billion in 2007 to US$ 108 billion(World Investment Report, 2017). Very recently, in order to increase foreign investments, the US also lowered its corporate tax rate to 21 per cent from 40 per cent.
The Indian Government should,therefore,have auniform corporate tax rate of 25 per cent for all companies including Indian and foreign companies. This will not only help India in attracting largerforeign inflows but also give more liquidity to Indian companies for further investments. With this move, India will be in line with competitive Asian economies such as Singapore, China, Thailand and Indonesia, etc. Last but not the least, itwillhelp the Government’s efforts in creating an environment to facilitate smooth functioning and growth of businesses, and thus create more jobs.