Taxing corporates on book profits is the best option
Given that finance minister Arun Jaitely has a twin objective of both lowering corporation tax rates while reducing exemptions, perhaps the best option would be to levy a tax on book profits of companies. Given the plethora of litigation on various exemptions, this would also eliminate litigation—the litigation, for instance, is so fierce, it goes down to dealing with definitions of what comprises manufacturing and whether software is included in this. Right now, while the nameplate tax rate is 30% without the surcharges, the way to look at the taxation is to levy a lower rate on the book profits that companies declare to their shareholders—the way to calculate the rate of taxation is to ensure that the tax collected in the book profit method is roughly equal to that collected right now. While companies using aggressive depreciation methods to lower tax rates will complain, the difference may actually not be that significant. Even today, if a company’s tax payable is very low—due to accelerated depreciation—it is charged a 20% minimum alternate tax (MAT) on the book profits. Take the case of a company whose book profits are Rs 100 and taxable profits Rs 50 due to accelerated depreciation. In this case, since the normal tax will be Rs 15 and the MAT Rs 20, the taxman will charge MAT—a simpler method, therefore, will be to just apply a lower tax rate on the book profit method. And since, in the process, the MAT will also disappear, another big source of litigation will also be tackled.
In the case of personal taxation, similarly, it would be a good idea to try and eliminate all benefits such as those on medical reimbursement, LTA and various investment allowances under Section 80C. The way to compensate people for the removal of the exemptions is to hike the exemption limit before which individuals have to pay taxes—if the first slab kicks in at around Rs 1.5 lakh higher than right now, most taxpayers will not be adversely affected. Apart from the fact that paying taxes will then become much simpler, the administrative costs of payroll operations for companies will also reduce substantially.