Budget may scrap 5% surcharge on corp tax

NEW DELHI: The national security surcharge of 5% on corporate tax is likely to go in the coming Budget, even if Finance Minister Jaswant Singh doesn''t agree to the Kelkar Committee recommendation for a sharp cut in corporate tax to 30%.
Minus the surcharge, corporate tax will fall to a flat 35%.
In the first nine months of the current year, the government has garnered Rs 1,216 crore, which is estimated to increase to Rs 1,600 crore by the year end.
The amount is not frightfully high, but the government feels that by abolishing the surcharge, it would be sending out a growth signal to the industry. As it is, the faith in government removing surcharges is not very high — these are often extended by a year or two.
A senior member of the Rajnath Singh Committee said that Kelkar''s recommendation to bring corporate tax still lower, to 30%, can be accepted only if the industry agrees to the withdrawal of big income tax exemptions currently given under sections 10A, 10B as well as 80IA, 80IB of the Income Tax Act.
These sections provide for a tax holiday in the case of investments in crucial infras- tructure sectors such as telecom and power, and for companies set up in special economic zones (SEZ).
It is now accepted that infrastructure sops must continue to provide the required growth push to the economy. In fact, key industry leaders are in favour of continuance of these sops, even if it means that corporate tax is retained at 35%.
It is this feedback from the industry that apparently clinched the issue. Evidently, corporates implementing big projects in infrastructure or in SEZs stand to gain more on account of a full tax holiday rather than a reduced corporate tax of 30%.
The Kelkar Committee gives an option to phase out the tax holiday for infrastructure projects over a period of three years.
Similarly, the tax holiday under sections 10A and 10B is also to be phased out in three years. This gives the government the option to not withdraw the exemptions right away.
At present, there appears to be some reluctance in aligning the differing depreciation rates included in the Companies Act and the I-T Act.
Aligning them would increase the tax burden of companies that make new investments. Higher depreciation from the I-T angle makes them virtually zero-tax companies but enables them to make profit as per the Companies Act provision.
There is a view that this must be retained to encourage investment demand in the economy at this critical stage, when recovery seems round the corner. Again, big corporates who are planning fresh investments will gain from this.
Thus, the ‘03-04 budget may be guided by the short- to medium-term needs of the industry and the economy. Sources said the finance ministry may end up picking and choosing from the Kelkar recommendations in a manner that ensures some revenue neutrality.