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Summarise Tax system of India

India proposes major tax reform
By Justine Lau in Hong Kong

Published: August 13 2009 05:11 | Last updated: August 13 2009 05:11

India has proposed cutting corporate tax rates in a major overhaul of the country’s tax system, while widening the tax base to battle growing budget deficits.

In a document published late on Tuesday, Finance Minister Pranab Mukherjee proposed to lower tax rates for all companies to 25 per cent, while non-Indian companies will be required to pay a branch profits tax of 15 per cent.

Domestic and foreign companies are currently taxed at the rates of 30 per cent and 40 per cent respectively, according to PricewaterhouseCoppers, whiles various surcharges apply.

Mr Mukherjee also said taxes on equities transactions should be abolished.

As a result, he said India needed to broaden its tax base by minimising exemptions and preventing tax avoidance.

India is under pressure to collect more taxes as the country fights mounting budget deficits and high tax evasion, as only a fraction of its population pay tax.

The country’s fiscal deficit would swell to 6.8 per cent of gross domestic product this year, up from 6.2 per cent last year, as a result of the government’s stimulus policies.

Mr Mukherjee has proposed to eliminate some tax exemptions, such as those to non-profit organisations, as “the tax base has been eroded through a steadily escalating range of exemptions” over the years”.

“The thrust of the Code is to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introduce moderate levels of taxation and expanding the tax base,” he said.

Mr Mukherjee plans to present his proposal to the parliament later this year after a 45-day public debate.