Recent Reforms in India's Corporate Income Tax Regime: Rationale, Impacts and Improvements

In a recent innovative policy reform, India's corporate income tax system was overhauled with optional lower rates in lieu of giving up complex deductions. However, official da ta re veals a puzzle wherein la rger co mpanies have op ted more fo r th e lower optional rates while smaller ones appear reticent in switching to the optional regime. This paper explores this issue using empirical methods. The evolution of tax rates is tracked through reforms simplifying the tax system in the 1990s, the subsequent conundrum of zero tax companies leading to introduction of minimum alternate tax, and the persistence of lower effective tax rates for larger c ompanies. This provides the rationale for a simpler tax regime with lower rates but fewer deductions. The user cost of capital approach is used to examine the economically relevant tax impact across various sectors and ownership types. The results indicate that in terms of user cost, the various lower tax options are not attractive, and under certain situat ions may be worse for younger and smaller companies. In light of the analysis, policy options are suggested to improve the scheme so as to achieve the laudable objective of implementing a simple tax regime with lower rates and minimal deductions.