Direct Taxation in India and selected countries – A Critical Review
CA Divya Jokhakar
Introduction
In order to take a look at the direct tax ecosystem in various parts of the world, we must understand the repercussion of having to pay income tax.
Income tax has direct impact on businesses, individuals, their savings and investment behavior across the world. High marginal tax rates can discourage work, innovation and capital investment since the businessman will spend professional time on compliances and tax planning. But on the reverse, reduction in tax rates affects the economic growth leading to increased deficits and resulting in bad services towards infrastructure and attitude by the government. First, the developing countries require large portion of tax revenues for smooth and effective functioning of the State at national and sub-national levels. Due to globalization and related competition developing countries face difficulties to maintain existing tax revenues.
The primary source of funding for any nation is taxation. It is a necessary hazard – not liked by people but cannot be done away by any government.
Any tax system must comprise of the following 4 benefits:
Equity: Tax payers earning high income must pay more tax compared to less tax by lower earning income group.
Progressive: The tax paid should reduce income equality and achieve equal distribution of wealth. The high tax paid by higher income group is used by the government to help the poor and reduce income inequality.
Productive: Such taxes reduce dependency on the national wealth of any nation.
Economic: Since the taxpayers pay income tax DIRECTLY, the administrative cost of the government to levy and collect taxes reduces which further enhances the economic growth.
One of the most disadvantageous behaviors of income tax is use of loopholes in the legal and tax system by the taxpayer. This tax evasion is a manipulative technique that leads to suppression of profits in the financial statements, reducing the taxpayers' tax liabilities. This article is trying to portray tax rates of selected countries and compare it with the parallel direct tax system in India
Tax rates
The 5 countries with the highest are:
Ivory Coast - 60%
Finland - 57%
Japan - 56%
Denmark - 56%
Austria - 55%
Compared to the highest personal tax rates of Canada (54%), the UK (45%) , United States – (50.3%) and China (45%)– India’s tax rate is lower. India’s personal tax rate is 42.74%. Germany has a progressive tax, which means that higher-income individuals pay more taxes than lower-income individuals.
The top 3 countries with highest corporate tax rates are:
Comoros - 50% (population 9 lakhs)
Puerto Rico - 38%
Chad, Equatorial Guinea , Zambia, - 35%
Countries that offer very low tax rates for foreign investors are called tax havens. Tax havens generate government revenue by attracting a generous amount of capital inflow and imposing fees, charges, and low tax rates. The world's top ten tax havens are Luxembourg, Cayman Islands, Isle of Man, Jersey, Ireland, Mauritius, Bermuda, Monaco, Switzerland, and the Bahamas.
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https://worldpopulationreview.com/country-rankings/highest-taxed-countries
Individuals
The tax rates for Individuals in India depend on the income brackets (slabs) and their age. Whereas, in the United States the tax brackets are mainly based on the marital status.
Income tax in UK is totally different. Income tax is charged at graduated rates, with higher rates of income tax applying to higher bands of income. Tax is charged on total income (from all earned and investment sources) less certain deductions and allowances. The 0% starting rate is for savings income only. Domicile status is important because individuals who are domiciled outside the United Kingdom can elect to pay tax on overseas investment income, non-UK capital gains, and certain offshore earnings only to the extent that these are remitted to the United Kingdom. This is called the 'remittance basis' of taxation. Overseas income and gains not remitted to the United Kingdom will not be subject to UK tax.
Singapore taxes it’s taxpayers on progressive rates (after set off of personal allowances), when income is accrues in Singapore, whether or not the taxpayer is resident of Singapore. Income derived from sources outside Singapore is only taxable if it is received in Singapore by a resident individual through a partnership in Singapore. Resident individuals are entitled to certain personal allowances and are subject to graduated tax rates ranging from 0% to 22% (24% from year of assessment 2024). Non-resident individuals are not entitled to any personal allowances and are subject to tax at a flat rate of 22% (24% from year of assessment 2024.
Corporates
Over the past 40 years, corporate tax rates have consistently declined on a global basis. In 1980, the unweighted average worldwide statutory tax rate was 40.11 percent. Today, the average statutory rate stands at 23.54 percent.
The world-wide average income tax rate across 180 countries is 24%. There are 15 nations which do not have corporate tax being tax havens. These obtain their rankings based on the Corporate Tax Haven Index, which is a ranking of jurisdiction most complicit in helping multinational corporations underpay corporate income tax. The Corporate Tax Haven Index (CTHI) thoroughly evaluates each jurisdictions tax and financial systems to create a clear picture of the world’s greatest enablers of global corporate tax abuse, and to highlight the laws and policies that policymakers can amend to reduce their jurisdiction’s enabling of corporate tax abuse.
Here are the top 3 tax havens based on their CTHI
British Virgin Islands — 2,853
Cayman Islands — 2,653
Bermuda — 2,508
The UAE has declared that it would levy a corporation tax rate of 9%. The announcement comes as India, another major Asian economy, unveiled its union budget for 2022, which is likely to have an influence on businesses in the UAE.
This is one of the reasons that India is very good for business and is the fastest growing country, also 6th in growing international economy. The Indian government’s corporate tax cut is part of a series of steps taken by it, to tackle the slowdown in economic growth. This way the government hopes attract more investments in the country and help revive the domestic manufacturing sectors. In the amendments to the Finance Act, 2019 tax rate for new manufacturing set up after 1st October, 2019 and commencing operations by 31st March, 2023 had fallen from 29% to 17%.
Minimum Alternate Tax
Minimum Alternate Tax (MAT) - the concept was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT (Alternate Minimum Tax).
Apart from India, AMT is applicable in the following countries and their tax rate and way of claiming AMT credit is explained hereunder:
Country
AMT Rate (MAT)
AMT credit (MAT)
United States of America
20% - abolished since 2017. Small business were exempted.
Transitional provisions allow for refund of 50% of the excess AMT credit
Argentina
AMT applicable @ 1% of value of specific corporate assets. – Abolished from 2019
AMT credit available against company's income tax liability for future 10 tax years.
Austria
AMT applicable @ 5% of a specified minimum share capital of those companies who are at a loss as per income tax provisions
AMT credit available against company's income tax liability in future tax years.
Italy
AMT applicable on "non-operating companies" on the book value of assets @ 1.5% on financial assets, 4.75% on real estate assets, and 12% on other assets.
Not applicable
South Korea
AMT applicable on income computed before applying tax credits or exemptions @ 10%, 12% or 17% based on income slabs. Lower rates applied for small and medium enterprises.
Not applicable
Presently, the Indian Government has kept MAT rate at 15% (excluding surcharge and cess). The companies making book profit can pay MAT at 15% in case that is higher than the Corporate Income tax rate under the old regime. India has corporate rate tax of 30% (for companies crossing turnover of Rs. 400 cr in FY 2019-20) else 25%. This rate must be compared with MAT rate and the highest of the tax should be paid. Whereas the new tax regime tax rate is 22%.
Let us see the corporate rate tax and selected provisions of the under mentioned nations:
Country
Normal Rate
Other information in the domestic law – Specifically provided
United States
21%
US-source income (e.g. interest, dividends, and royalties) not effectively connected with a non-US corporation’s business continues to be taxed on a gross basis at 30%.
New US federal tax called the ‘base erosion and anti-abuse tax' (BEAT) is targeted on US tax-base erosion by imposing an additional corporate tax liability on corporations.
BEAT is levied on (other than regulated investment companies [RICs], real estate investment trusts [REITs] that together with their affiliates, have average annual gross receipts for the 3 year period ending with the preceding tax year of at least USD 500 million and which make base-eroding payments to related foreign persons during the tax year.
United Kingdom
19%
UK follows a territorial tax system. Resident companies are taxable in the United Kingdom on their worldwide profits (subject to an opt-out for non-UK PEs)
UK Non-resident companies are subject to corporation tax on the trading profits attributable to a UK PE (permanent establishment).
Where the taxable profits can be attributed to the exploitation of patents, a lower tax of 10% applies.
Special Corporate Tax regimes are available for companies into:
Oil and Gas
Life Insurance
Tonnage
Banking Sector
Real Estate Investment Trust (REIT)
Qualifying Asset Holding Company (QAHC)
France
25%
A resident company is subject to CIT in France on its French-sourced income. Hence, an income attributable to foreign business activity (if there is no treaty in force between France and the relevant foreign country) or to a foreign PE (if a tax treaty applies) is excluded from the French tax basis.
Reduced tax rates apply on capital gains. social contribution tax is due by any corporation at the rate of 0.16% assessed on the revenue excluding VAT and after deduction of a 19 million EUROs relief.
Singapore
17%
Companies (resident and non-resident) that carry on a business in Singapore are taxed on their Singapore-sourced income when it arises BUT the foreign-sourced income when it is remitted or deemed remitted to Singapore.
A partial tax exemption and a three-year start-up tax exemption for qualifying start-up companies are available (not available on property development and investment companies).
China
25%
Lower corporate tax is available for
Qualified new/high tech enterprises at 15%
Encouraged designated key software enterprises and encouraged designated integrated circuits (IC) design enterprises at 10% after the first five years of CIT exemption
Qualified technology-advanced service enterprises at 15%.
Australia
30%
25% only to those companies that, together with certain 'connected' entities, fall below the aggregated turnover threshold of AUD 50 million.
Integrity measures also ensure that a company will not qualify for the reduced rate unless the specifically defined passive income (including, among other things, interest, rents, and net capital gains) that it derives represents not more than 80% of its total assessable income for the year.
Germany
15%
A basic surcharge of 5.5% (solidarity surcharge) is levied
The trade tax rate is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz) depending on where the PEs of the business are located.
Conclusion:
The Organization of Economic Corporation and Development (OECD) has announced that a global deal to ensure big companies pay a Global Minimum Tax (GMT) rate of 15% has been agreed by 136 countries (including India). Indian government has introduced a favorable tax regime for new manufacturing companies. The Taxation Laws (Amendment) Ordinance, 2019 for the newly incorporated company to pay tax at 15% (excluding surcharge and cess) to promote the new manufacturing start-ups. The maximum you need to pay is 17.16% (with mandatory surcharge of 10% and cess of 4%).
The company has been set up and registered on or after 1st October, 2019 and has commenced manufacturing on or before 31st March, 2024. A company that does not opt for the above concessional tax regime and avails any tax exemption/ incentive, shall continue to pay tax at pre-amended rates. However, the option of availing of the lower tax regime of 22% can be opted for after the expiry of tax during the holiday/ exemption period. Once the same has opted for it cannot be subsequently withdrawn by the taxpayer. MAT rate for companies availing exemptions/ incentives reduced from 18.5% to 15%.
This shows that the ease of doing business in India could be beneficial for the investors as India is an attractive destination for investments with it’s corporate tax rate is quiet competitive.
