With more economic activity entering the tax net post demonetisation, government should lower the corporate tax rate to 18 per cent, said CII in its pre-Budget memorandum to the Finance Ministry.
"With a larger share of the economy captured in tax net, the government has greater space to lower corporate income tax rates. In our recommendations for Budget 2017-18, CII has called for reducing the corporate income tax rate to 18 per cent, including all surcharges and cess, along with removal of all tax incentives and concessions," CII Director General Chandrajit Banerjee said.
The current corporate tax rate works out to be 30 per cent plus cess and surcharge.
The industry body suggested creation of a National Innovation Fund of Rs 10,000 crore. The chamber observed that demonetisation has set the stage for reducing the corporate income tax rate and introducing efficient implementation of the Goods and Services Tax.
CII noted that there are 32 incentives applicable on corporate profits before calculating tax. The effective tax rate works out to about 19.8 per cent.
"Going by experience, it is found that a lower tax rate encourages higher compliance; hence, we believe that lowering the tax rate to 18 per cent and removing all tax exemptions will not negatively impact government revenues on this head," Banerjee said, adding that the 18 per cent rate will bring India in line with attractive international investment destinations such as Singapore and the UK.
CII suggested that no grandfathering of exemptions is required and implementation can be undertaken at one go. Roll-out of GST would be similarly facilitated if more transactions are through formal channels such as banks and digital payments.
"Less-cash use implies higher tracking of transactions, which feeds into better and more efficient implementation of GST," noted the CII Director General.
In its suggestions submitted to the ministry, CII requested a four-pronged strategy for strengthening economic activity in the short term.
Apart from reducing corporate income tax rate, CII also recommended revival of investments, creation of better quality jobs in the formal sector and a national technology strategy with ten-fold increase in public investment in research in higher education institutions.
"CII has called for revival of infrastructure investments by raising funds through asset recycling, PSU disinvestment and accelerated public-private partnerships.
Government can encourage creation of good quality jobs through introduction of fixed-term employment and contributions to employee provident fund as in the national textile policy," said Banerjee.
A National Innovation Fund with a corpus of at least Rs 10,000 crore should be set up, using Rs 8,000 crore collected through cess on technology imports.
Finance Minister Arun Jaitley had announced in his 2015 Budget speech that the rate of corporate tax will be reduced from 30 per cent to 25 per cent over the next four years along with corresponding phasing out of exemptions and deductions.