After a gap of 10 years, the government on Saturday announced cut in corporate tax by 5 per cent to 25 per cent over four years starting April 2016, but tax exemptions and incentives to the industry will be withdrawn.
Jaitley, in his first full-year budget, said the basic rate of corporate tax in India at 30 per cent is higher than the rates prevalent in the other major Asian economies, making domestic industry uncompetitive.
Moreover, the effective collection of corporate tax is about 23 per cent. "We lose out on both counts, i.e. we are considered as having a high corporate tax regime but we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue.
"It also gives room for avoidable discretion. I, therefore, propose to reduce the rate of corporate tax from 30 per cent to 25 per cent over the next four years," he said.
Jaitley said the move will lead to higher level of investment, higher growth and more jobs.
The minister further said the process of reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for
corporate taxpayers, which incidentally account for a large number of tax disputes.
"I wanted to start the phased reduction of corporate tax rate and phased elimination of exemptions right away; but I thought it would be appropriate to give advance notice that these changes will start from the next financial year," he said.
Government's stated policy, he said, is to avoid sudden surprises and instability in tax policy.
"Exemptions to individual taxpayers will, however, continue since they facilitate savings which get transferred to investment and economic growth," the minister said.
In 2014-15, the revenue forgone on account of exemptions and incentives is estimated at Rs 62,399 crore (Rs 623.99 billion).
Corporate tax collection in the current fiscal is estimated at Rs 4,26,079 crore (Rs 4.26 trillion). For 2015-16, the collection is estimated at Rs 4,70,628 crore (Rs 4.7 trillion).
In 2005, the then Finance Minister P Chidambaram had reduced the corporate tax to 30 per cent from 35 per cent. .