Increase in the rate of surcharge increases cost of doing business for domestic companies
Issue/Justification
The Finance Act, 2015 increased the rate of surcharge levied on domestic companies by 2 per cent. The surcharge at the rate of 7 per cent shall be levied in case of a domestic company if the total income of the domestic company exceeds INR one crore but does not exceed INR ten crore and at the rate of 12 per cent in case total income exceeds INR ten crore.
The comparative scenarios of tax rate for domestic companies (including surcharge and education cess) is as follows:-
| Partic ulars | Inc ome upt o INR 1 crore | Inco me abov e INR 1 crore but upto INR 10 crore | Inco me abov e INR 10 crore |
| Pre 2015 surchar ge scenari o | 30.9 % | 32.4 45% | 33.9 9% |
| Post 2015 surchar ge scenari o | 30.9 % | 30.9 % | 34.6 08% |
The Finance Act, 2015 has also increased the surcharge rate from 10 per cent to 12 per cent on DDT. The increase in surcharge by 2 per cent will bring the effective DDT rate to 20.358 per cent as against the present rate of 19.995 per cent.
The increased rate of surcharge on tax makes cost of doing business in India significantly high. The increased tax cost will adversely impact the investors’ sentiments and economic growth.
Further, the effective tax rate applicable to domestic companies also happens to be one of the highest in the world with a very few countries1 levying a higher tax rate (of 34.6%) for income levels of more than INR 10 crore.
DDT is a levy on the company which was earlier levied in the hands of the shareholders. The increased DDT rate (inclusive of surcharge and education cess) creates disparity when compared with the tax rate of dividends received by an Indian company from specified foreign subsidiaries.
In the past, the government has introduced additional surcharge for a limited period, for example the Finance Act, 2013 had increased the surcharge from 5 per cent to 10 per cent on domestic companies whose taxable income exceeds 10 crore per year. Further in case of foreign companies, who pay the higher rate of corporate tax, the surcharge was increased from 2 per cent to 5 per cent. In case of dividend distribution tax or tax on distributed income, surcharge was increased from 5 per cent to 10 per cent. However, such additional surcharge were in force only for one year i.e. for Financial Year 2013-14.
Suggestion
The increased rate of surcharge on tax and DDT makes cost of doing business in India significantly high. It is recommended that the levy of additional surcharge on tax rates should be removed (regardless of the ceiling of income) on domestic companies. Further the additional surcharge on DDT should also be removed.
Since the government has already decaled that it will be reducing corporate tax rates from 30 per cent to 25 per cent in a phased manner, without prejudice to the above suggestion, the tax rates should be made inclusive of all surcharge.
“If the company income 1 CR;
normal tax_31% 3,100,000
DDT _Rate 17.25% 1,190,250
total IT 4,290,250
To Investers 57.10% 5,709,750
Govenment 42.90% 4,290,250