Lower corporate taxes to attract FDI: KPMG

MUMBAI: If India is to emerge as an attractive destination for foreign direct investment (FDI), it should implement the Kelkar Committee recommendation, which calls for a reduction in corporate rates to 30%, says global consultancy firm KPMG.

Corporate tax rates are already significantly lower in other Asian countries, and with many nations like the UK, Germany, Spain, Singapore and China likely to go for a cut next year, India cannot stand isolated, it feels.

“The link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services, but the link between lower corporate tax rates and increased inward investment, with the increased employment and infrastructure development it can bring, is less well understood,” KPMG’s global head of tax, Loughlin Hickey, said.

In its latest annual global tax rate survey, the audit, tax, and advisory services firm has said that it finds signs that indirect taxes may rise as corporate taxes fall.

Taxes like Value-added tax (VAT), central sales tax (CST) and service tax (ST) come under indirect taxes.

KMPG has also called for the rationalisation of indirect taxes in India by 2010.

“The KPMG Survey clearly shows that, world over, especially in EU and OECD countries, tax rates have been reduced,” Sudhir Kapadia, national head, tax and regulatory services, KPMG India, said.

The survey shows that corporate tax rates in Asian countries are significantly lower than those of India’s. For example, Hong Kong’s corporate tax rate is 17.5%, Singapore’s 20% and Malaysia’s 27%.

“These countries are also in the process of developing their economies, and with their lower corporate tax rates, they can provide stiff competition to India in attracting FDI,” he said.

In India, corporate tax rate for foreign companies with income over Rs 1 crore is 42.23%. For domestic firms with income below Rs 1 crore, it’s 34%.

In China, though tax rates for Foreign Investment Enterprises (FIE) is 33%, it’s reduced to 24% or 15%, if the FIE is located in a designated zone.

KPMG found that EU nations continue to have the lowest corporate taxes among developed economies. The average rate in the EU was 24.2%, against 27.8% in OECD countries, 28% in Latin America and 30.1% in Asia-Pacific.

In the US and Japan, corporate tax rates stand at 40% and 40.7%, respectively, making them the most expensive of the developed economies for corporate taxpayers.

Japan’s main indirect tax rate is 5%. While the US does not have a federal goods and services tax (GST), the states impose their own sales taxes at various rates.

The survey also found that indirect taxes in Europe are the highest in the world. VAT or GST rates in EU countries average 19.5%, compared with 17.7% in OECD nations, 14.2% in Latin America and only 10.8% in Asia Pacific.

The survey underlines the increasing importance of indirect taxes as a revenue-gathering strategy in many countries, with a tendency among competing nations to reduce corporate taxes to attract investment and shore up the shortfall by either rationalising or increasing indirect taxes.

“The significant increase in revenues of states that have implemented VAT, along with the impressive revenue growth of service tax at the federal level, are indicators of the growing importance of indirect taxes as a revenue source across the country.

Therefore, it is imperative that we focus on the implementation of GST by 2010 and rationalise indirect taxes, to avoid multiplicity of taxes, ensure revenues/ compliance and provide a better and sound tax administration,” Subramaniam Harishanker, national head, indirect tax, KPMG.

The standard VAT rates in India is 12.5% and reduced rates of 4%, 1% and 0% for certain category of products. CST is charged at 4% or higher of the applicable VAT rate in the originating state, and 10% ST is charged at 12.36% on 96 categories of services.

China has VAT, consumption tax and business tax. The standard VAT rate is 17%, with reduced rates of 13% and 0% for select categories of goods. Business tax ranges from 3% - 20% and consumption tax from 3-40% ad valorem.

According to KPMG’s global head of tax, Loughlin Hickey, there is a trend for indirect taxes to rise to compensate for lower corporate tax rates.

The highest indirect taxes in the world, over 25%, are found in Denmark, Norway and Sweden. Each of these countries has a corporate tax rate of 28%, which puts them at the upper end of the corporate tax rate scale.

Answering the oft-repeated query on why governments do not rely even more heavily on indirect tax revenues, KPMG says higher indirect taxes are politically difficult to introduce.